Arch Capital Group Ltd. Aktie

Good day, ladies and gentlemen, and welcome to the 1Q 2026 Arch Capital Earnings Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded. Before the company gets started with its update, management wants to first remind everyone that certain statements in yesterday's press release and discussed on this call may constitute forward-looking statements under the federal securities laws.

These statements are based upon management's current assessments and assumptions and are subject to a number of risks and uncertainties. Consequently, actual results may differ materially from those expressed or implied. For more information on the risks and other factors that may affect future performance, investors should review the periodic reports that are filed by the company with the SEC from time to time, including our annual report on Form 10-K for the 2025 fiscal year.

Additionally, certain statements contained in the call that are not based on historical facts are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. The company intends the forward-looking statements in the call to be subject to the safe harbor created thereby.

Management also will make reference to certain non-GAAP measures of financial performance. The reconciliations to GAAP for each non-GAAP financial measure can be found in the company's current report on Form 8-K furnished to the SEC yesterday, which contains the company's earnings press release and is available on the company's website at www.archgroup.com and on the SEC's website at www.sec.gov.

I would now like to introduce your host for today's conference, Mr. Nicolas Papadopoulo and Mr. Francois Morin. Sir, you may begin.

Good morning, and welcome to Arch's First Quarter of 2026 Earnings Call. We delivered a strong quarter, reflecting both attractive underwriting margin and the disciplined execution of our underwriting and capital management strategies. After-tax operating income for the quarter was $901 million or $2.50 per share, producing an annualized net income return on average common equity of 17.8%.

Today's market is clearly more competitive than in recent years. That said, rates and terms and conditions in aggregate still support strong returns. Capturing those returns requires the ability and willingness to actively manage the portfolio across and within lines of business.

This is embedded in Arch's operating principles and among our differentiating traits to dynamically add to areas where returns are attractive while declining those risks that no longer provide an adequate margin of safety.

Regardless of where we are in the cycle, Arch is committed to generating superior returns for our shareholders. I'll now provide updates across our reporting segments, beginning with insurance, which generated $66 million of underwriting income in the first quarter. This compares favorably to the first quarter in 2025 that was impacted by the California wildfires.

Overall, market conditions remained favorable. However, top line growth in the segment was essentially flat in the quarter, reflecting our focus on profitability over volume as competitive pressures increase. Growth opportunities remain across most casualty-focused businesses, including excess and surplus line casualty, construction, alternative markets as well as a number of our London market businesses.

Growth was offset by softening rates in a few areas, including large account and Excess and Surplus line property. As well as in some short-tail lines in London. We also chose not to renew certain program business acquired in the middle market commercial transaction that did not align with our risk appetite or meet our profitability requirements. As we have discussed on prior calls, these nonrenewals are expected to reduce net premium written by approximately $250 million throughout 2026.

I also want to note a significant operational milestone achieved in our middle market commercial business. Earlier this month, our team successfully completed the data and system migration of the acquired businesses from Allianz to Arch own systems.

The ability to complete this effort in just 18 months speaks not only to the dedication of our teams, but also represents a strong use case for artificial intelligence in accelerating systems and platform transformation. With this significant step completed, the business can now pursue its objective of creating a scalable best-in-class experience for clients and distribution partners.

Our Reinsurance Segment delivered an excellent $441 million of underwriting income in the quarter, a significant increase from the $167 million in the first quarter of 2025, which was heavily impacted by the California wildfires. Rate reductions and increased retentions by our cedents contributed to a 6% decline in net premiums written versus the same quarter last year.

Short-tail lines, including other property, property catastrophe and marine were the primary driver of these declines. Strong industry results over the past few years have attracted significant new capacity from traditional markets and third party capital, resulting in a broadly competitive environment.

This additional supply continues to put downward pressure on property catastrophe and short-term rates while also moderating the push for needed rate increases in some casualty lines. However, underwriting performance remained excellent. Our focused and disciplined underwriting led to the reinsurance group's 76% combined ratio, marking the fourth straight quarter of sub 80% combined ratios.

Consistent with our cycle management philosophy, our reinsurance team actively manages the portfolio mix by continuing to write new business that meets our risk-adjusted returns target and by reducing our share of business that falls below our minimum return threshold.

The mortgage segment delivered another strong quarter with $221 million of underwriting income to go along with $266 million of net premiums written. Mortgage originations picked up modestly in the first quarter, though affordability challenges tied to high mortgage rates and home prices continue to constrain demand.

Credit quality across our mortgage insurance portfolio remains excellent, with delinquencies normalizing from seasonally higher levels in the fourth quarter of 2025. Competition remains disciplined, and we continue to pursue growth through innovation and new product introductions across our global footprint.

Overall, mortgage performance continues to exceed expectations and provides shareholders with a differentiated and diversifying source of earnings that support long-term value creation.

Turning to investments, which contributed $408 million or $1.13 of net investment income per share in the quarter. The decline in net investment income from the fourth quarter of 2025 was driven in part by lower cash yields, lower qualified refundable tax credit benefits and seasonal compensation payouts.

Our nearly $48 billion in investment portfolio provides a material contribution to earnings and book value growth, effectively raising our quarterly earnings flow.

In the first quarter, we repurchased $783 million worth of Arch common stock while still increasing book value per share by 1.7%. Our first priority remains to deploy capital into our business. When organic opportunities do not meet our return threshold, we view repurchasing our shares as an attractive use of excess capital, reflecting our conviction in the intrinsic value of the franchise.

The Board's recent $3 billion increase to our share repurchase authorization underscores this approach to capital allocation. To conclude, Arch delivered another strong quarter by staying true to our principles of disciplined cycle management and by leveraging the strength of the Arch brand and our diversified platform.

In today's market, underwriting discipline powered by insight from our investment in data and analytics, rewarding our underwriter for profit not volume and prudent capital management continues to differentiate Arch and drive long-term value for our investors.

Arch's 25-year record of strong return and compounding book value at double-digit rates is a direct result of hard work and discipline. That is Arch. That is our DNA. And that is why we believe we will continue to deliver best-in-class results across market cycle and into the future.

I will now turn the call over to Francois, who will talk through the financials in more detail. Francois?

Thank you, Nicolas, and good morning to all. Last night, we reported our first quarter results with after-tax operating income of $2.50 per share and an annualized operating income return on average common equity of 15.4%. Book value per share grew by 1.7% in the quarter.

Our 3 business segments once again delivered excellent underlying results with an overall ex-cat accident year combined ratio of 82.3% up 130 basis points from the same quarter last year and consistent with the more competitive environment we are facing. I will provide more color on trends in each of our segments shortly.

Our underwriting income included $200 million of favorable prior year development on a pretax basis in the first quarter or 5 points on the overall combined ratio. We recognized favorable development across all 3 of our segments and in many of our lines of business, but mainly in short-tail lines in our P&C segments and in mortgage due to strong cure activity.

Of note this quarter, we commuted a large transaction, which increased the level of favorable prior year development in our reinsurance segment by approximately 25% in the quarter. Current year catastrophe losses were $174 million, net of reinsurance and reinstatement premiums and were mainly the result of winter storms in the U.S. and the Iran conflict.

All in, these losses were slightly lower than our seasonally adjusted expectations for natural catastrophes. The insurance segment's gross premiums written grew 2%, while net premiums written declined 1.4% year-over-year.

As Nicolas explained, the nonrenewal of certain program business acquired as part of the MCE transaction impacted our top line this quarter. In addition, net premiums written were also impacted by a shift in business mix toward lines with lower net to gross retention ratios.

The ex-cat accident year loss ratio improved by 70 basis points to 56.7% compared to the same quarter 1 year ago. The acquisition expense ratio for the current accident year increased by 160 basis points as the benefit we observed in the first quarter of 2025 from the write-off of deferred acquisition costs from the MCE acquired business rolled off.

We would expect the most recent acquisition expense ratio to be more representative of long-term expectations. Our operating expense ratio was higher this quarter as we incurred additional expenses related to the transition of our middle market business to Arch Systems.

We would expect our operating expense ratio to revert back to a level closer to historical levels during the second half of the year. The Reinsurance segment had an excellent quarter, $441 million in pretax underwriting income. Overall, gross premiums written were down by 2.3%, while net premiums written were down by 6% from the same quarter 1 year ago.

Net premiums written were up in Specialty, partly due to timing differences in the recognition of certain treaty renewals that impacted our financials in the first quarter of 2025. Over 1/3 of the decrease in net premiums written in property catastrophe was attributable to a lower level of reinstatement premiums compared to a year ago, which were impacted by the California wildfires.

Overall, our ex-catastrophe accident year combined ratio of 78.1% is comparable to last year's result for the same quarter. Our mortgage segment produced another very strong quarter with underwriting income of $221 million.

Net premiums earned were down by approximately $6 million from last quarter, mostly driven by lower levels of cancellation premiums in our CRT business. Of note this quarter, new insurance written at U.S. MI reflects a large non-GSE transaction of $2.2 billion in NIW.

Absent this transaction, which increased our NIW by 15%, we would expect our market share of the PMI market to remain relatively unchanged from the prior quarter. The delinquency rate for our U.S. MI business decreased to 2.06%, consistent with our expectations and seasonal trends. On the investment front, we earned a combined $568 million from net investment income and income from funds accounted using the equity method or $1.57 per share pretax, slightly down from the $1.60 per share we earned last quarter.

Cash flow from operations remained positive at $1.2 billion for the quarter. Our portfolio remains a very high quality with a short duration and in line with our asset allocation targets. Income from operating affiliates was $36 million for the quarter, up from $17 million from the same quarter 1 year ago, which was impacted by the California wildfires.

As a reminder, this quarter's result reflects our lower ownership stake in Somers Re since the start of the year. Our effective tax rate on pretax operating income was 14.8%, reflecting the mix of income by tax jurisdiction. It was slightly below the 16% to 18% previously guided range, mostly due to a 1.7% benefit from discrete items.

As of January 1, our peak zone natural catastrophe probable maximum loss from a single event 1 in 250-year return level on a net basis remained flat at $1.9 billion and now stands at 8.2% of tangible shareholders' equity. On the capital management front, we repurchased $783 million of our shares in the quarter or 8.3 million shares.

We have repurchased an additional $311 million in shares so far this quarter through last night. Our balance sheet remains in excellent health with strong capitalization and low leverage. With these introductory comments, we are now prepared to take your questions.

[Operator Instructions] Our first question comes from Elyse Greenspan from Wells Fargo.

My first question is on property cat on the reinsurance side. I was just hoping to get some of your expectations for the midyear renewals. And then if you expect declines in the book to continue, would you expect your cat load to come down after the midyears?

Yes. Elyse, so we don't -- as we always said, we don't have a crystal ball, but for the 6/1, I think we really expect the market to remain competitive and to adjust our underwriting stand based on the actual rate decrease that we will see at that time. So we don't really have a forecast there.

On the overall trend of the catastrophe portfolio, I think we have huge headwinds because of the double-digit rate decrease. And we really -- as I said it in prior calls, we really monitor the property cat through a lens of 50 separate zones. So I think some -- if I go back 2 years ago, they were all green.

So now we have a bunch of them that are still green. I think Florida is still green, and -- but we have a bunch of them that are yellow and some of them that have turned red. So I think it -- depending on the -- where the business renew and our perception of the attractiveness of that zone, our underwriting team, we make the decision, so.

Okay. And then on the casualty side, you guys were mentioning still some good opportunities, I think, on both the insurance and the reinsurance side. Can you just talk through within casualty where you're currently seeing the best growth opportunities?

Yes. I think we're still optimistic on the casualty, and we think that the pain is not gone through yet. As you may have seen, I think we're still seeing some little development from the year 2016 and '17, but the most recent years, '21, '22, '23, '24, we've seen additional adverse development. And so that should, in our view, continue to sustain price increases above trend. So in terms of our risk appetite on the insurance and the reinsurance, I think it hasn't changed. I think we like the specialty, casualty, the excess and surplus line casualty primary position on the large accounts.

So that's where we play. We are not -- we stay away from the commercial auto and also the large account excess towers, which we think are still very challenging despite some of the rate increases that we've seen.

Our next question comes from David Motemaden from Evercore ISI.

I was hoping maybe just to get an update on the insurance book, where we stand just on rate versus trend in both the U.S. and internationally.

So starting with the U.S., I think on the U.S., I think we are broadly getting rate at trend. And I think so as I mentioned earlier, we are getting rate above trend on the casualty lines of business. And we are getting as the [ tractor ] on the trend is really the short-tail property lines of business where we've seen a rapid rate decrease.

But when you sum it up for North America, I think we're seeing rate slightly below trend. If you go to international, I think we have more short-tail lines on the international book of business. So we're seeing some rate pressure on the short-tail lines. So overall, a low 1-digit rate decrease over trend overall, but we started there with pretty high margins. So we feel very good about the business there.

Got it. And then I believe you mentioned just in reinsurance, some of the supply there and good returns in short-tail lines trickling into casualty re. Just wondering, does that change sort of how you're thinking about the growth opportunity there as an offset to the headwinds on the property side?

So on the casualty on the reinsurance side, I think we're mainly talking about quota shares. So I think the -- as I mentioned earlier, I think we like the fundamental of the specialty, casualty business. The difficulty there, it's really the ceding commissions. I think based on the past experience of the casualty market, ceding commission should have gone down, but we get excess supply.

I think there's a lot of our competitors wanting to get on that business or increase share on that business. So that allows for the ceding commission to stay flat and on the best account to continue to go up. So the sidecars, the latest flavor of the day with the casualty sidecar is just going to add to that dynamic.

Our next question comes from Tracy Benguigui from Wolfe Research.

One of the largest primary insurers had said on their earnings call some pretty pessimistic views of property pricing, particularly shared and layered in North America and in London and the culprit is cheaper forms of capital coming in from MGAs, reinsurers and alternative capital.

So from your vantage point, is this a real structural shift in the market? And how does that influence your underwriting appetite?

For us, it's more business as usual. So the advantage that we have is that we are not a retail large account players. We don't play in that space. So that has been -- that has gone up, it has coming rapidly going down. So we don't play in that space. We play in the excess and surplus line property business. And so that space is getting competitive, and we are taking a very careful approach to that line of business right now, so.

Excellent. And there was also a recent settlement development early in the second quarter around Francis Scott Bridge collapse. How are you currently sizing the industry loss? And has that pushed your loss estimate upward?

So in that particular case, I think we were holding much more conservative estimates than -- loss estimate than the market. So no real change for us.

Our next question comes from Mike Zaremski from BMO.

In the Insurance segment, the underlying loss ratio continues to show some healthy improvement. Is that -- if you can kind of talk about some of the drivers, I believe, right, some of the nonrenewals on some programs, I think, helping that. But if you can kind of talk around any dynamics we should consider?

Yes. This quarter, in particular, was -- we benefited from a relatively benign amount of activity in attritional losses in London, in particular. So our International segment book did very well this quarter. So that explains most of the favorable or reduction in the kind of ex-cat loss ratio compared to a year ago. Again, as a reminder, we'd encourage you all to look at trailing 12-month kind of rolling numbers to kind of get a view on performance of the book. And the impact of the MCE nonrenewals is yet to be seen, right? I think it's -- we're -- as the business earns out, it will show up in the numbers.

But at this time, we don't think it will be material. I think it's still a relatively small part of the book. You think of an $8 billion insurance segment book of business, the impact of nonrenewing some of these programs will be somewhat immaterial or limited. So hopefully, that explains that really the quarter was all about kind of really good performance out of London.

Got it. And Francois, my follow-up, I think you mentioned on the catastrophe side that this quarter's losses were, I think you said a bit lower than "normal" and you also added a bit on the Iran conflict.

Maybe you can kind of just elaborate on the Iran conflict, how you guys are thinking about that? Is it all IBNR, are there real losses or...

Yes. I mean there's nothing paid, but it's certainly -- there are some real losses, specialty book out of London, like terror, political violence. I mean those are some of the lines that are exposed, will be exposed. It's ongoing. So we took a first stab at it this quarter based on what had happened in, call it, in the month of March, but we will expect -- we do expect more losses to come through in the second quarter, and we'll keep reporting on it.

But it's -- yes, it's ongoing. And the point in my comments was really to communicate that we have been able to absorb those losses in the first quarter as part of our overall cat load, even though technically, the cat load is only on the natural catastrophe side.

So it's a man-made. We call that man-made cat, but we still report it as part of our cat losses to the Street, and that's kind of included in the overall number.

Our next question comes from Andrew Kligerman from TD Cowen.

So I know you've gotten a lot of questions about property. And I'm kind of -- just to kind of gauge a sense of where we are in the cycle, which you are very good at. I'm wondering if you could share -- and again, this is blunt. Where are you seeing risk-adjusted returns in property catastrophe reinsurance?

And I know there are different layers and risk online, et cetera. But like if you had to gauge a risk-adjusted return range, what are we seeing today? And maybe the same question with the E&S Property that you've been writing.

And so the way you have to understand is that -- as I explained, we -- property cat, we manage very dynamically based on the actual underlying profitability we see in 50 zones. So we said earlier that 2 or 3 years ago, we were in the 30s. I think the business we have on the book today is still, in our mind, very attractive because, again, we're not writing some of the business that we think has fallen below the threshold for us to ride the business.

So we think the business -- it's a different mix than it was probably 3 years ago. The mix has shifted, but the business that we have today remains attractive on our book. So -- and we are still in the high teens, I think.

I see. I see. But it sounds Nicolas...

And on E&S -- yes. Go ahead.

Yes. Just following up on that one, Nicolas. It sounds like that there is business out there that Arch Capital won't write that is well below your upper teens return threshold. Is that fair?

That's fair.

Our next question comes from Cave Montazeri from Deutsche Bank.

First question is on share repurchases. It was nice to see a little uptick. I think this quarter, it was 87% of your operating income versus roughly 70% over each of the past 2 quarters. Now my question is, if the current pricing trends continue, you don't really need any capital to grow and you're starting from a pretty healthy capital position.

So without any obvious M&A targets, is there any reason why you couldn't pay out 100% of income, potentially even more given that you're releasing capital when you're shrinking? I guess I don't want to sound greedy, but like I'm wondering what held you back from doing more this quarter?

I mean it's nothing -- I mean, nothing stopping us. We don't set targets and how much we're going to buy back. So we go at it. We look at what's in front of us. We look at both in terms of the stock price and also liquidity in the stock, which is still very liquid. So I mean, so far it hasn't been a problem. But in terms of like could we buy back 100% of our income for the year? We could.

I mean we -- but that's not how we think about it. It's more, I'd say, an outcome if things work out in a certain way in terms of kind of, again, the stock price and the volume, et cetera. So you saw the reauthorization by the Board. I think, hopefully, that gives you a little bit of a some direction in terms of how we think about the opportunity there and how much capital we think we can buy back or looking to buy back.

But whether it happens this quarter or next quarter or next year, I think that's nothing set in stone. So we'll react to what's in front of us. But to answer your question, there's really no structural limitations in beyond, again, the regulations around buying back stock that we have to deal with.

That's great to hear. My second question, I just want to pivot to cyber insurance. And maybe if you can help us separate the cyclical versus structural pieces for us. So I guess first question, where are we in the underwriting clock today for cyber?

And then structurally, like given the recent developments in AI and the potential for cyber attacks to become more frequent and more destructive, does that change your view of tail risk, aggregation risk or even the long-term insurability of the product?

Yes. I think in terms of [ underwriting clock ], I would think cyber is probably around 3:00 p.m. I think so it's still okay, but it's getting to that point. So in terms of the recent AI Anthropic Mythos, we see it as a real current threat. But we don't really see it's changing the cyber product. I think we see the cyber product as more of a -- the cyber market as more of an arm race between attacker and defender. And certainly, Mythos is accelerating that trend, but Mythos can help the attacker, but the defender can also reinforce defense using the same model. So we think it's really an acceleration of the speed at which maybe cyber attacks can be conducted. And it's -- and to your point, it's also an acceleration of the scale.

So I would think because the scale would be larger, I would think we see it more as an increased systemic risk. So we are taking a very careful approach to that in our RDS scenarios, so.

Our next question comes from Josh Shanker from Bank of America.

Yes. I know you don't give guidance certainly on margins, but it's an interesting time. Obviously, property declines and prices are well noted. Broadly speaking, at Arch and other companies, loss ratios are generally in the same sort of range they were a year ago, but growth is about 0. I guess maybe it's another clock question, but as you sort of give an outlook to internally for the next year, do you expect Arch's and the industry's loss ratios to begin to deteriorate from here? Or do you think the current levels are supportable?

I don't know about the industry, to be honest. It's hard to predict because as far as we are concerned, we are confident in our ability to manage the cycle. That's what we do. So I think we -- I think that's our first line of defense. If things fall below our threshold, we reduce. And we are confident in our ability to continue to find attractive opportunities to be able to expand.

And I think we have -- certainly, the property market is coming down. So everybody can see that. But we still think we have a good opportunity on the casualty side. So overall, I think we -- again, as I said, based on our own mix of business, we think that we see rates just below trend. So that would support the thesis that margins are sustainable at least for the near future.

And then in terms of SME the commercial business, the mid-core acquisition was in part to be less cyclical. Are you seeing fruits of that play out in 2026 that you're able to capture some incremental share in less cyclical [ SME ] business?

So again, we just -- as I mentioned in my remarks, we just finished the cutover. So the main focus on the -- for us has been to roll over the portfolio and to get -- to create an entirely work bench with which we can underwrite the business on Arch paper. So those have been the primary goals.

So now that this is done, it opens our abilities to try to enhance the value proposition of that business and build scale. So I think we -- I would doubt -- I think it's more of a 2027 game than it is in 2026 because after you do the cutover, you have to stabilize, then we have to start to -- we're focusing on building new tools to really help our underwriters with [ battery ] selection, triage and so on that will make them more productive.

Our next question comes from Rob Cox with Goldman Sachs.

Just a question on premium leverage. So on the one hand, the business is shifting away from property and property cat, which should allow for an increase to premium leverage. But in the past, we've noticed it's been hard to right size leverage in a softening market like this due to the lack of growth opportunities.

So I guess the question is, do you foresee premium leverage would continue to fall like this as we get further into the soft market? And how does that impact your view on the future ROEs?

Well, certainly, we're managing the equity side of the leverage. So if we can't grow, we can deploy the capital in the business, as we've been doing like the last few quarters, we'll be returning more of the capital to the shareholders. So that's certainly a tool we have that we have been using, we'll keep using and make sure that our ROEs remain attractive.

So I'd say, for sure, like if the mix goes more long tail than short tail, it helps on the leverage. And again, the equity part of it is something we're watching carefully.

That's helpful. And then just a follow-up on terms and conditions. Just curious if any negotiations on terms and conditions started to change in the quarter? And like which terms you think could start to get further negotiated as we move deeper into the soft market?

Which lines of business are you talking about property cat or the...

Yes, particularly property cat reinsurance.

So we've talked to our team, and we are seeing a bit more, but it remains a very small portion of some of the aggregates, a bit more aggregates, a bit more top and drops, which -- but it's at the margin so far. So -- but as the market gets more competitive, we would expect more of those structures that are much more difficult to price to come back to the market.

Our next question comes from Ryan Tunis with Cantor.

So the company is obviously a much larger company today than it was 7 years ago, both from a premium side, but also from an OpEx side. And I imagine a lot of that increase in OpEx is in support of hard market growth. So my question is, no longer being in a hard market, to what extent are you looking at managing the OpEx side of things as a potential source of boosting margins?

I think the answer is yes. That's something that's in our mind. I think the loss ratio part is probably more important as the market gets softer. But yes, I think I would say, especially in the insurance group, I mean, the expense side is important, and we are actually paying attention to it.

Okay. And then just a follow-up for Francois. Underlying loss ratio in the mortgage insurance segment looked a little elevated. Nothing really stood out to me, maybe a little bit higher reserve for default. I'm not sure if that's seasonal, but how should we interpret that loss ratio result this quarter in mind?

Yes. Definitely, some of it is a result of the change or the growth in the average mortgage that goes into NOD. So if you think of the loans that are currently going in NOD this quarter are more -- from more recent vintage years and post-COVID effectively, right, and that's when mortgage loans were up in size.

So as you look at the frequency assumptions have not changed. They've been flat for us the last couple of years, I want to say. But the math behind the reserve levels is such that we apply the frequency with the severity per loan and the severity has -- remains stable, but it's the average size of the loan that's hitting the loss ratio.

So I think it's a little bit kind of like an evolving kind of thing within the loss ratios. I think it's -- for mortgage, it's gone up a little bit, but still very much within what we would expect it to be.

Our next question comes from Alex Scott with Barclays.

I guess I wanted to follow-up on the excess capital and less about just asking how much you buy back. But thinking more broadly, I mean, you don't have the business that you can really lean into growth in right now like you have in sort of most environments in the past. It's been 1 of your 3 businesses has been attractive to really leg into. So does it create any need to sort of look at potentially diversifying transaction?

And then is legging into an artificial intelligence investment and doing it that way to try to achieve growth something that you think is achievable? Just trying to understand how you're thinking about the different ways you get invested.

Yes. I mean I'll take the first part. I mean, certainly, the business are all doing well. I mean, yes, I mean, you're right. I think the growth opportunities in all 3 of our segments are somewhat limited. We're working hard trying to find new opportunities internationally and et cetera, like in mortgage and insurance for sure.

But at this point, it's harder to see how the market will support massive or outsized growth in any of our segments. So yes, I mean, the share buybacks, again, like as we generate -- we keep generating meaningful earnings, I think that we don't want to accumulate excess capital beyond what we think is prudent. So we're certainly looking to return it or do something with it.

M&A is -- we look at a lot of things, but we want -- for us to do something, given our scale, we truly think it has to be something that is additive. We're not interested in doing deals just for the sake of doing deals. It has to make us better. It has to make us more competitive, increase our presence or our scale in a market, et cetera. So we're very selective there.

But we're trying to think outside the box, too. I mean if there's things that we don't do currently that could make us better, we'll explore those. In terms of AI, I don't -- I mean, it's certainly something that is coming at us really quickly, really fast. We're trying to think of ways where we can kind of, again, automate things and we're doing some of that. But I think there's -- it's still very early innings, very early days of that. So I think that will evolve, and we'll see where it goes.

Yes, [indiscernible] we've been investing in AI for the last 10 years, both in mortgage and P&C. So we've deployed a bunch of AI and machine learning models and -- but it's changing really fast. And I think industry and our struggle is really to -- really show results while at the same time, working on our data strategy and our integration of our system to really support AI at scale.

And third, really figure out what AI would look like 3 years from now because it's changing so quickly. If you look at the Anthropic model, they open huge, huge opportunities to do certain things, but what's next? So I think you really have to take -- and it's a lot of investment. At the same time, you're trying to create productivity and the insight for your underwriters to be able to compete. So I think it's...

Yes. All helpful. And there is a follow-up, I wanted to see if you could talk a little bit about exposure to private credit. I know I think in the past, you've talked about the alternatives portfolio allocation of private credit. So have a rough idea of that. But I wanted to see if you could tell us about anything that would be sort of considered private credit within the fixed maturity part of the book.

Yes. We have some, but limited, right? So we have it both in our, again, call it, public markets and private markets. The general thinking that the strategy with our investment guys has been to go more on the high-quality loans, so kind of low loan-to-value and kind of very, very good collateral supporting the investments.

So yes, it's something we're watching like everybody else. But at this point, there's no red flags, nothing that really is rising to a level where we have to take action.

Our next question comes from Matthew Heimermann with Citi.

I just wanted to follow-up on your call related to using AI in the technology rollover of mid-corp. And just curious how that experience has been different than past. I recognize that you're not a significant acquirer. So universe of past might be smaller, but just thought that was a provocative comment.

Yes. So I think -- I mean, the way it really help us and speed up the process is to write some of the codes. I think we really didn't do enough there, but when we did, it was really helpful. And the big help was on the testing. A lot of the testing was done by AI, and that really accelerated the time to market. So those are the 2 aspects that we -- when we talk to the teams, they really highlight as the impact on AI on this shift on this [ cutover ].

Because again, Right, Matt, just quickly, I mean, again, it was a build-out of a brand-new effectively platform infrastructure, right? So it's unusual in that sense that we bought the business, but without the systems, we had to create this infrastructure, this platform, brand new that we ourselves at Arch did not have. So it's -- that's where I think to Nicolas' point, AI kind of capabilities really came through and help speed up the process.

That's helpful. I just want to make sure I understand the use of the word testing correctly. Is that -- should I think about that as auditing outputs of...

Running scenario to make -- is running scenario to make sure that every time you create -- we created a new platform to a good point, Francois, for context. And so every time you create a new software, you have a lot of testing that -- to make sure that the software is doing what it's supposed to do. And a lot of it today can be done through AI as opposed to individuals going in and asking the underwriter to test the guys that collect the cash to test that -- what they answers get to the right places and so on.

Our next question comes from Meyer Shields with KBW.

Francois, starting question for you. I guess I expected operating expense in reinsurance to go down because you should have more Bermuda tax credits. And I guess I didn't see that. I was hoping you could talk us through the moving parts.

Down relative to last year or last quarter?

Last year. For sure, up from last quarter.

Yes, they're certainly up from last quarter. From last year, I mean, yes, there's some -- no question that there's some QRTCs this quarter in reinsurance. I mean, what explains the increase is more investments in staffing and building out further the insurance -- the reinsurance group.

So I think there's -- well, I know that there's been kind of hiring around like the technology and improving systems. So that's certainly a big part of it. And then a little bit of noise around some of our structured deals that we wrote a year ago.

I mean they were actually beneficial to the expense ratio, the OpEx ratio a year ago. So if you adjust for that, that explains a little bit of the difference as well. But nothing -- I'd say nothing, I'd say, structural that we -- was a surprise to us.

Okay. That's very helpful. And then shifting gears, there are some reports of very significant rate increases for product lines exposed to the Iran conflict. And I was wondering whether Arch is trying to write more of that business or being more cautious because of the risk.

So we do that, and that would be with our London office where we write some political violence and [ war on ]. So we've been cautious, but we -- the rates have spiked up. So we actually wrote a little bit more business, but in a very cautious way.

Our next question comes from Rowland Mayer from RBC Capital Markets.

I just wanted to ask on your PML disclosure because I found it curious. Do you think that the catastrophe models are fully capturing the improved loss environment in Florida from AOB benefit reform?

The PMLs that we report?

Yes. I'm just curious on when you model the cat losses out in the state, if it's fully capturing how the sort of personal line side of the business has seen significant in the loss environment.

Yes, it's been reflected. I think we -- historically, we had -- as we do our modeling, we had loads for certain features of the specific to the Florida market that with the reforms, I think, have changed. So we changed how we model those things on fraud and additional expenses around kind of claim handling, et cetera.

So that's all captured right now. So yes, our thinking has changed. And what we report to you is how we see the business, how we expect the environment to respond given what we know about the latest reports.

Our next question comes from Brian Meredith with UBS.

Back on the PMLs, I noticed your PMLs did not decline, kind of stayed the same at 4/1 versus your 1/1 disclosure, but you're declining property cat and everything. Can you help us reconcile kind of what's going on with the PMLs relative to what you're doing with property reinsurance and insurance?

Yes. I think right, Brian, it's the 4/1 number. So not a ton -- again, think of it, it's the peak zone. It's -- so I would expect changes at 7/1 next quarter. There's not a ton of activity for us necessarily at the 4/1 renewal that impacts our peak zone.

So that would be the answer being Florida, Tri-state -- Tri-County in particular. We'll see what 6/1 and 7/1 does for us, but that's where I would expect maybe a more meaningful change.

Got you. But I mean even if I look at -- I'm sorry if I even look at what happened between September and 1/1, it still was up despite the reduction in business you had at 1/1 renewals, right? So is it like -- is it simply we're just looking at changes in rate? Are you dropping exposure as well?

Well, at 1/1, I mean, we held on to most of the business. We actually grew a little. So yes, we gave up some rate, but we still found that, that business met our -- was still attractive in terms of returns. So dollars of PML didn't really change a whole lot. There's always -- you lose one account, you replace it with another.

So it might on the margin change the PMLs a little bit. But you're right. I mean, the rates went down, so we gave up some returns weren't as good as they had been the year before. But it's -- again, looking ahead, 6/1, 7/1, don't know how it's all going to shake out, but that's when you may want -- I mean there could be some more significant changes in the PMLs depending on kind of what we will do or not.

As we said earlier, we put Florida was green. So I think for us, getting the return, we're not going to let go the renewals, and we're going to try at the margin to write more. So I think that was not a zone where we decided to cut back.

Our next question comes from Pablo Singzon with JPMorgan.

This will be a quick one. Nicolas, just want to follow-up on your comments regarding casualty sidecars. Do you think this is a blip? Or is there a risk of casualty or refacing the same structural headwinds that property cat experienced with alternative capital exacerbating the soft market cycle there?

I couldn't hear you well. Which line of business?

Just the casualty sidecars and do you think that ultimately, it will have the same effect that alternative capital had on property cat?

I mean it's hard to tell. The thing we know is that it's not helping. I think the thing that may -- the thing that mitigate that is the security risk. I think the people that have used those sidecars, they usually use it because they want to write that business, but they don't like it. I haven't seen people that are in the market like Arch using those tools yet.

So I think it's -- for the buyer and for the broker, I mean, they have a decision to make because those claims are going to get paid 5, 6 years, 7 years from now and will the vehicle and the cedent, which are usually not the best rated cedents, be there to pay the claims. So I think that may be a mitigation factor compared to property cat where the loss is imminent, and we know the capital loads are high. So I think that -- that would be the difference. Yes.

Our next question comes from Yaron Kinar with Mizuho.

Just want to circle back to the man-made kind of Iran-related losses. Can you break them out for us for insurance and reinsurance and then maybe what the associated premiums are as well, earned premiums?

Well, we don't break out -- I mean, we report everything as part of cats. But again, the -- it's part of the -- it's priced, right? So when we write some of these perils or these lines of business, again, political violence, terror, et cetera, which in this case, are generating cat losses to us, again, just in terms of how we report them to you.

There's -- it's part of the pricing, but it's not really captured in the, call it, our cat load per se that we report to you.

Yes. I think to give you an idea, I think when we talk to our teams, we think the political violence, war on loss is about $3 billion. And we think the -- it's about the premium that you collect for those lines of business. So that gives you -- I mean, it's not a precise information, but that's the sense that we have, $2 billion maybe.

$2 billion. And that's across both reinsurance and insurance.

No, no. So the loss for the market today, I think, is estimated at $3 billion. We estimate -- it's an estimate, the premium for those lines of business that have been impacted to be around $2 billion...

Because I guess what I'm trying to get at here is when I look at the kind of the underlying loss ratio here, it now doesn't capture some losses, but we still have the premiums associated with that book and the attritional. So like as we think forward, I want to make sure that we're using the right base for the underlying loss ratio.

Yes. good point. And maybe -- I mean, we can do that offline with you if you -- if that's okay. I mean I think we can kind of walk you through what the -- yes.

Yes. That would be perfect. And then my other question was in the insurance book, I saw that the other liability claims made line grew quite nicely in the quarter. Can you talk about what drove that?

Yes. It's really the transaction liability. I think we write transaction liability, both in North America and in our London office. And it's really driven by higher pricing in that line of business as well as the M&A activity that has picked up in the last couple of quarters.

I'm not showing any further questions. Would you like to proceed with any further remarks?

Yes, I want to thank you all to participate to our call. And we feel good about the business as it is. I think we are challenged with the market condition for sure. But I think as we said, we think we are equipped and our teams are equipped and ready to compete in that market environment and generate decent return for our shareholders. So thank you.

Ladies and gentlemen, thank you for participating in today's conference. This concludes the program. You may all disconnect.

Good afternoon, everyone. Thank you for joining us today. I'm Bart Dziarski covering diversified financials at RBC, stepping in for my teammate, Rowland Mayor. Thrilled today to be hosting Francois Morin, CFO of Arch Capital Group. Arch is a roughly $35 billion diversified insurer with insurance, reinsurance and mortgage insurance operations, and they were added to the S&P 500 in 2022. So -- Francois, welcome.

Thank you.

Thanks for joining us. Maybe we could start at a high level with regards to Arch's strategy. What are you focused on? And what would you say are your 3 engines of growth? And if you could tie into that capital allocation?

Sure. Yes, as you said, we are a kind of global property, casualty, specialty insurer and reinsurer. So what we focus on is what we would consider to be specialty lines of business. And by that, we mean lines of business where the underwriting expertise is key in the process. Yes, scale matters and being efficient and kind of having good processes is always a positive, but we think where we can differentiate and outperform the market will truly be in how we go through risk selection and certainly kind of the underwriting process.

So for us, our platform is really divided into 3 key segments. One is commercial insurance, and that is predominantly done outside -- in North America and in Continental Europe. We have a reinsurance group that is more global in nature, somewhat centralized in terms of underwriting, but has broad access to global risks, Asia, North America and Europe and around the world. And finally, what maybe is the one differentiating factor at Arch compared to some of our peers is we have a mortgage insurance group or segment that is somewhat unique. A lot of the mortgage insurance companies that you may have heard of in the U.S. are monoline companies. So -- at Arch, we have the benefit. And when we talk about capital deployment of having this mortgage insurance company that -- or group that is part of a diversified group. And that really has been one area I'd say where we've been able to really do well is that has given us really a third vehicle really another way to deploy capital as we try to navigate through cycles.

As you know, the insurance industry, particularly on the P&C side, can be very cyclical. And for us, the game is not about being a market share player. It's not about being the largest or the most efficient in any one line of business, but really where we think we can outperform is around being smart and thoughtful about where we play, where we deploy our capital in the right time in the market.

Stepping back a number of years in the last soft market on the P&C side that really materialize more in the 2015 to 2019 years or so. The opportunities on the traditional insurance -- commercial insurance side were not really as exciting, and that's the time when we really grew our mortgage insurance presence, and that really, we thought -- that showed the value of the diversified platform we have. Since then, I think it's been a slightly different story where the P&C markets have done much better, the last few years, starting in '21 or so and through last year for sure, both insurance and reinsurance have done well.

Our mortgage business has still done well, but has become less critical to the overall engine. So that's really how I present Arch to you all. It's really a business model that is founded around diversification, around cycle management, around capital deployment to what we perceive to be the best opportunities given the -- I mean, their respective cycles.

Got it. Thanks for that helpful overview. And maybe we can segue from that last point around there's concerns around being in a soft pricing cycle largely attributed to property at the moment. And so when you see that play out and the 3 engines within your business could be impacted. Like how do you think about deploying capital into those different businesses with that sort of broader pricing dynamic, if you will?

Right. It's an ongoing process, something we do regularly, quarterly, et cetera, like each of our business units is to ask with finding the right opportunities where they can put the capital to work. I'd say the one thing that maybe makes us a bit different than some of our peers, again, is we don't really set targets on premium, growth or capital deployment. Really, those are more a result and not an input, I'd say, in the process.

So we at group make sure that we obviously have enough capital to be able to deploy. But each of the segments are really tasked with evaluating the opportunities. And if they perceive that the opportunities are good enough to put the capital to work and achieve the returns that we're expecting, there -- it's on them to really make that happen. But if the opportunities -- to your example, if property is one where they don't see the same level of profitability in the business, they are encouraged and we expect them to really pull back because at the end of the day, for us, it's really about delivering the bottom line results and the bottom line returns.

So it's truly an evaluation ongoing between returns and kind of where is the best opportunity. In the last few years, we've been somewhat, I'd say, spoiled in that each 3 or all 3 of our segments have been generating very good returns. But as the market may soften, if it starts -- it has begun to soften and if it continues in that trajectory, we'll have to make decisions along the way to pull back in some lines and effectively deploy less capital, which will return to shareholders and with the expectation that we'll be able to deploy it down the road when the market is more attractive. So we're somewhat agnostic as to where we deploy the capital as long as it meets our bottom line expectations.

Okay. That's helpful. And could you unpack that last point a little bit? Because if you pull back from writing business, you're building excess capital. And could we think of a potentially fourth stool, i.e., capital return then in that dynamic? Like how should investors think about that this year or next year as part of the Arch story -- capital return?

Absolutely. I mean capital return is front and center for us at the moment. Again, stepping back, the last few years, we've grown at a quite rapid pace, specifically in reinsurance, where I think our premium volume went up 5x over 5 years. So it was a pretty steep growth rate in the last few years, that growth has tapered off. I mean, and we saw some numbers even we shrank in a few places last year. So in an environment where growth will be harder to come and it's -- not that we don't want to grow, but I think the opportunities for growth are more limited as in general, more the market is doing -- I mean, trying working hard to retain what they have, like there's no pull back in terms of capacity deployment. The reality is -- and we're still in an environment where the returns are very good. We're effectively building up excess capital at a pretty healthy pace. And the most important thing, we don't want to do is not waste that capital. So in the event and more likely than not that we won't be able to deploy it all, we'll return it to the shareholders.

Great. I think that makes total sense. I want to talk about reinsurance. So we just came through 1/1 renewals. Any takeaways from your perspective that you saw in that renewal cycle? And can you give us kind of unpacking a little bit of your mix within the reinsurance segment?

Yes. It was not unexpected, although the -- maybe the severity or the quantum of the rate decreases may be a bit higher than we would have expected, call it, back in September, right? So we were -- as we were planning the 1/1 renewals, we thought, yes, I mean, it's been -- we've had really 2-plus years of truly spectacular returns on the property side in particular. Like there is a significant reset in '23. So '23-'24, very strong pricing; '25, very good, although a midyear '25 started to inch down a little. So we were expecting some level of rate decreases at 1/1 this year. And it turned out maybe that they were a bit higher. There's more competition for that business than we expected. So not a big surprise.

On the property side, very much a result again of the strong returns and whether it's third-party capital that incrementally coming into the space, but if I try to summarize it, to me, it's more that the incumbents that the existing players just wanted to retain the business, right? So you have 2-plus years of north of 20% returns, and that just creates more capital to deploy into the space. And I think that kind of fueled a little bit some of the -- some of these rate decreases.

Other than that, the other lines of business behave as I think expected. We thought casualty would do maybe a bit better, not in the sense of the pricing but in terms of volume, in terms of opportunities that we thought we might be able to see. And again, some of that is not necessarily our decision. Sometimes it's the ceding companies that like the business as well. Pricing is good. They're comfortable holding on to a bit more of that business. They're not looking to transfer as much out. So some of it is not totally within our control. So -- we would have liked to see a bit more opportunities there. But still, what we saw was, I think, healthy, good returns. So we're happy with what we got. And for us, it's -- again, 1/1, as you know, is a big part of -- half of the business, effectively or so renews at 1/1. There'll be more to come, at 4/1, 6/1, 7/1. But even though returns are lower than they were a year ago, they're still very healthy, and that's the takeaway at this point.

Okay. That's a good color. And maybe just to get a little bit specific on the 1/1 renewals. Could you walk us through from a competition perspective, what you saw in property cat in terms of do you get the sense that like the bottom is forming? Or is competition still sort of elevated in there? What are your reads on the dynamics?

I mean the dynamic is somewhat similar to the last couple of years. I think there's more capacity, more competition in the upper layers. I think there's -- as you get to be more risk remote, I think carriers and third-party capital providers are -- get a sense of comfort that I can get some premium with somewhat limited risk. So there's been more competition there. I think where we typically play pretty much across the stack. So we're -- we'll play in different places. And we're -- certainly, we don't want to be in a position where we're just trading dollars. And I think with the reset we saw in '23, that is less the case than it used to be. The retentions are still high enough that we don't have that risk as much. So what we see is an area where the return periods are not as -- are a bit more attractive to us. So competition, I think, again, more so on the higher layers, in the lower layers, depends on the zone, depends on where people are playing, but nothing that was, I'd say, unusual.

Okay. Okay. Maybe we can turn to primary now. So you've announced some re-underwriting efforts, if you will, in the MCE segment. So can you maybe walk us through that and how we should think about the growth profitability outcome as a result of those re-underwriting efforts?

Yes. The re-underwriting was more, I'd say, in a piece of the business that came on the transaction, specifically with their programs division within the acquisition that we identified. We didn't necessarily want it, but it came with a transaction. It's something that was probably going to be -- I mean we looked at immediately and identified as an area that we probably downsized and that's what we did. So we effectively had some nonrenewal kind of actions that took place in the latter part of '24 and early '25. And those are being kind of earning in or they're going to start to materialize a bit more in our financial statements as we move forward. And that was more a decision of whether -- I mean, the -- as you know, the challenge sometimes with MGAs or program managers is alignment of interest and making sure that they underwrite the classes of business that are attractive to us. And there are some things that -- some of the programs that came with it that we just didn't feel comfortable with. So we acted on those pretty quickly. But that's kind of -- I want to say the decision, the actions have taken place. Now it's just a matter of kind of having that flow through the financials. But the core -- the asset that we were really that we wanted and we got our hands on was the true middle market business. And for us, like just in terms of scale, this is business, call it, middle -- again, not the Fortune 500 companies, but still sizable companies with what we call usually property led. So they will have generally sizable property exposure. It could be a hotel. It could be manufacturing plant. And where we play is more in the -- what we call the upper middle market with an average premium of, call it, $200,000 per policy. So it's still sizable with property with casualty exposures as part of the package. And that business has done well for us. So it was still for us a way to get into that business that is established and it's hard to build. We had thought about building that from scratch. But the distribution that you require to be present in all 50 states, et cetera, is a difficult thing to do. So for us, the acquisition we made was the right way to play the game at this point. So we're very happy with that. It's done well. Now as we kind of season it and we've been able -- we have 1 year of renewals under our belt. I think we're going to be -- our plans are really to try to make it better, make it a bit more sizable as part of the Arch family. And hopefully, we can do that in the not-too-distant future.

Great. Want to move towards industry reserves as a topic, and it's a concern for investors. You've spent time at Arch as Chief Risk Officer and Chief Actuary, so you've got a great lens on this. Can you walk us through reserving philosophy at Arch. And then secondly, like are you taking any actions? Have you looked at any past books in terms of that dynamic?

Yes, that's a great question. I think reserves are -- all companies, it's something that -- there's different ways to go about it. I think our view has been the most critical thing, and I know that's probably easier said than done, but is to be realistic from the first data point, right? So call it, the initial loss pick is probably what matters more than anything because we're big believers that reserving feeds into pricing and feeds into reserving. So it's that whole cycle that is so critical on how companies perform. If you walk into a line of business or you have a somewhat optimistic view of what types of risk you're underwriting, and the downside that maybe you take with that line of business, well, if you're optimistic there, it's going to mean that most likely you're going to maybe be one of the cheaper prices on the street, which will mean we'll grow that business and then you'll reinforce that decision early on that, yes, my loss pick was good and then -- you do that a few years, you accumulate a lot of exposure and then maybe you wake up 3, 4, 5 years down the road and realize that you were -- you missed the market a little.

So we take the -- we challenge ourselves like constantly whether -- and it's more an issue. Mortgage is a different animal, but certainly on insurance and reinsurance to really think about both in loss trends like inflation is a key factor, certainly long-tail lines. How does that -- how do we think about it? We are big believers in having more of a long-term view of not being overly influenced by recent trends, whether they're favorable or unfavorable on loss cost trends. So we're trying really to have a long-term view on them. We stick with it. Certainly, the more years you accumulate, the more information you have, so that's a good thing. We think that's why like newer players are somewhat disadvantaged when they're starting a new line of business. But for us, it's the initial loss pick. And then it's -- our philosophy is reacted to bad news quickly and take as long as you can to react to the good news. So it doesn't mean because there's no claim that's being reported that it's all going to run well. But -- hope it does. But until we know for sure, we're just going to hold on to the reserves we have and maybe it takes 3, 5, 10-plus years to release the favorable news. But that's kind of been our mindset is react to the bad news as soon as you can. Good news, let's wait and see. And again, the reserves is just an estimate. So they'll play out over time, but there's no rush in our mind.

Okay. That's helpful. And do you see any lines from an industry level where just underwriters are getting in over their skis on their reserves or like some pockets? Or is it...

Well, I think commercial auto in general, has been maybe the most difficult line for many carriers. I think it's been the challenge around maybe the large jury awards and like loss trends that have been running hot for many, many years, even though pricing has been very good. I mean the rate increases have been strong, double digits, et cetera, but keeping up with loss trends has been a challenge. So are we closer to being about right or adequate, you hope so. But every time we say that, something else happens. So that's probably been the most difficult line. And you can point to oversized jury awards and the way law firms are playing the bar has been kind of a bit more aggressive trying to get larger settlements out of the carrier. So that's been something that we've been watching carefully. But for us, it's not a big thing for us. We don't do a ton of commercial auto, so that I think we've been able to avoid that for the most part.

So I'd say that's probably the one that sticks out the most and then any kind of excess kind of business umbrella like businesses where, again, going back to my earlier point around the initial loss pick and assumptions you make about the loss cost inflation. And again, if you missed that early on, it finds a way to compound over time. So that can be a problem.

Okay. Got it. Helpful. I wanted to touch on alternative sources of capital, if you will, or new entrants, and there's MGAs, ILS. And how is Arch involved, if at all, within those dynamics? And can you walk us through that?

Sure. Specifically on MGAs, I mean we have been working with MGAs forever. I think for us right now, it's been a slightly -- it's a different strategy, different execution, the insurance side versus the reinsurance side. On the insurance side, for the most part, we have a handful of managers that we've dealt with or worked with for many years. And as you know, program managers, I talked about aligning incentives and that's certainly something we have to worry about and think about. But establishing a relationship with a program manager, it takes time and connectivity in the systems and aligning kind of underwriting authority, et cetera. So there's a lot of things that have to work well for the program to be successful. And the reality is it's a -- it's usually something -- it's not something you want to come in and out of each year, right? You go into a relationship with a view to being somewhat of a long-term commitment and that even though it's an annual decision, you want to kind of -- there's an investment you make to get it started, so you want to see that kind of produce some results for you. So -- we've had those, but the reality is we -- that hasn't really grown. I think the number of carriers or program managers we deal with has been relatively stable. And it gives us access to some lines of business or some distribution, some niches of business that we wouldn't get otherwise. So that's been our strategy. There's I think, the right place, the right time for program business to be part of the broader offering. But our preference is still to go out to the market with the Arch brand. We think it's better for us for the long term to be the brand that they know in the market.

On the reinsurance side, it's a slightly different kind of story because -- as you think about our ability and willingness to really flex in and out of markets, more so on the reinsurance side as the market gets better. Partnering with MGAs we think, is a very efficient way to do that and then flex in and out of market. So you saw us kind of grow our property business significantly in '23-'24, in particular, in reinsurance. And a lot of that was through relationships with MGA. So as the market gets more attractive to us, and we think we have the ability to deploy more capital, we think doing that through MGAs that bring you that distribution is a very efficient way to do that as the market starts to -- not be as attractive, that's when we start to challenge some of those kind of decisions and say, well, maybe we pull back a little bit.

So I think -- again, so we have, again, done a lot of business with MGAs over the years, but I'd say the reinsurance has been more cyclical with the underwriting cycle, whereas on the insurance side, it's a little bit stickier. And with -- but going forward, I'd say our preference would be more -- to be more, to lead more with Arch brands than MGA brands.

Okay. Got it. And within ILS, if we could just follow up, is that a dynamic that you're seeing? If so, what inning do you think we're in from the ILS market? Like how does Arch approach that segment of...

Yes. I mean we've been like -- we have a pretty sizable ILS franchise on the property reinsurance side. So we have third-party capital supporting our underwriting. We have side cars. We have a couple of the vehicles that have worked well over the years, and that has grown certainly in the last 5-plus years, I want to say. We have our own more -- I mean, it's a multiline effectively side car called Somers Re. So that's been a vehicle for us that is -- that's how we can bring in third-party investors with a slightly longer kind of view of the investment in having kind of a more permanent capital base. So that is a best rated. So it's a more permanent vehicle that we think works well for us.

Yes, I mean, third-party capital is an important part of the business for the industry in general. I think the issue is always around having third-party capital that is, I'd say, has similar, if not identical, kind of expectations about returns. I think some of the issues we had in the past was ILS capital being kind of offering or wanting to participate on risk without we think at the right level of return. So that creates some inefficiencies or arbitrage in the system. But as long as these providers are see risk in a similar way as we do, there's a role for them. But ultimately, we still think going with -- for us, leading with the Arch brand is better than -- and we use them really to -- we think we can provide solutions to our partners. That's our goal, right? We want to be the place they come to us to solve some of their issues, some of their challenges. For us to have third-party capital supporting the offering, that's great. We want to leverage that. But ultimately, we want to be the front of the discussion or the decision to kind of support these decisions.

Got it. Let's talk M&A. So there's been a lot of M&A in the industry within the broader P&C market. Like could Arch be a participant in that M&A? Are there any product gaps potentially that you'd be looking to fill through that mechanism?

Yes. We're all -- I mean we look at a lot of things. I mean, we have certainly an appetite to get better and get -- to be more relevant. I mean -- so no question that when we look at M&A for us, it's the mindset like what is there out there that we could -- if they were part of Arch, would make Arch better. And in the past, we've made a couple of balance sheet kind of larger acquisitions, United Guaranty on the mortgage side was certainly transformative. But as you get bigger, it's harder to find like somethings that were -- you minimize the overlap and you got to think about culture. And so all these things matter. Ultimately, the MCE acquisition, we think, is a model that we think worked well in the sense that it certainly was a market segment that we weren't in that we were able to get our -- to get some business -- extract a business unit from an established carrier.

Can we do more of that? Absolutely. So at this point, we're -- we like what we do. We got a lot of offerings, a lot of franchises, a lot of distribution, both in North America and in Europe. So I think we touch a lot of things. I think for us, it's going to be more, I'd say, on the margin trying to -- and if there's a line of business that if we're like #5 in the space, could be #2 if we did this kind of this acquisition, those are the types of questions that we ask ourselves. But given our size, as you know, it's -- there's a lot of things that we do already. So we're always ultra careful with a kind of -- we're just not going to make an acquisition just to make an acquisition. It's got to make us better.

Great. I think we're coming up on time, so we'll end it there. Thank you very much for joining us this afternoon, and thank you, Francois, for spending time with us.

Thanks for being here.

Good day, ladies and gentlemen, and welcome to 4Q 2025 Arch Capital Earnings Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded.

Before the company gets started with its update, management wants to first remind everyone that certain statements in yesterday's press release and discussed on this call may constitute forward-looking statements under the federal securities laws. These statements are based upon management's current assessments and assumptions and are subject to a number of risks and uncertainties. Consequently, actual results may differ materially from those expressed or implied. For more information on the risks and other factors that may affect future performance, investors should review periodic reports that are filed by the company with the SEC from time to time, including our annual report on Form 10-K for the 2024 fiscal year.

Additionally, certain statements contained in the call that are not based on historical facts are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. The company intends the forward-looking statements in the call to be subject to safe harbor created thereby.

Management also will make reference to certain non-GAAP measures of financial performance. The reconciliation to GAAP for each non-GAAP financial measure can be found in the company's current report on Form 8-K furnished to the SEC yesterday, which contains the company's earnings press release and is available on the company's website at www.archgroup.com and on the SEC website at www.sec.gov.

I will now introduce your host for today's conference, Mr. Nicolas Papadopoulo and Mr. Francois Morin. Sirs, you may begin.

Good morning, and welcome to our fourth quarter earnings call. We concluded another exceptional year by generating $1.1 billion of after-tax operating income in the fourth quarter up 26% from the same period in 2024. Our quarterly consolidated combined ratio of 80.6% reflects excellent underwriting results across the group.

For the full year, we produced $3.7 billion of after-tax operating income, a new high, resulting in after-tax operating earnings per share of $9.84 and a 17.1% annualized operating return on average common equity for 2025.

Continued strong operating cash flows and capital generation enabled the repurchase of $1.9 billion of Arch common stock in 2025. We strongly believe our stock is a good long-term investment and share buybacks represent an efficient way to return excess capital to our shareholders over time.

Since our inception, Arch's commitment to maximize long-term shareholder value has been unwavering. In 2025, book value per share, our preferred measure of value creation, increased by 22.6%. Since our start in 2001, book value per share has grown at a compound annual growth rate in excess of 15%, letting us at the top of our peer group. We remain confident in our ability to deliver strong returns throughout the underwriting cycle and to build on the legacy of disciplined execution and consistent results.

We head into 2026 with measured optimism. We are starting from a position of strength that recognize that competition is increasing in several lines of business. In an evolving market, the Arch playbook, which has served us well over the years is a differentiator that remains as valid and effective as ever. Our playbook is anchored by an underwriting culture defined by deep expertise and disciplined risk selection. Combined with a diversified business model, a proven record of best-in-class cycle management and the strength of the Arch brand, we are well positioned to consistently deliver superior results for our shareholders.

I will now provide updates on our reporting segments. I'll begin with our insurance group, which delivered $190 million of underwriting income in the fourth quarter. Underwriting performance was solid with an underlying ex cat combined ratio of 90.8% in the quarter, similar to the fourth quarter last year. Gross premium written increased 2% from the fourth quarter of 2024. In North America, we continued to grow in specialty casualty lines, including alternative market, construction and E&S casualty. As for our international units, we increased writings through our Bermuda platform and in Continental Europe. I will note that we experienced a year-over-year decline in net premium written, which Francois will explain in his remarks.

Across the insurance platform, our underwriters [indiscernible] towards lines of business, offering the most attractive margins and we grew premium volume in more than half of our business units, indicating a healthier underlying market that industry headlines would suggest.

In North America, the rate environment is largely keeping pace with loss cost trends. While pricing in our International business unit is tracking slightly below loss trends. Within each geography, consistent with our cycle management approach, we will adjust our business mix in response to changing market conditions and pricing dynamics.

Our insurance platform has expanded significantly over the last several years, providing more opportunities to capitalize on attractive margins in many areas. Going forward, our underwriters will continue to pursue growth in those areas where risk-adjusted returns exceed or meet our long-term objectives.

Moving to reinsurance which delivered a record $1.6 billion of underwriting income for the year. The fourth quarter combined ratio ex cats and prior year development was 74.9% consistent with the prior year quarter and reflective of continued underlying market profitability. Gross premium written were flat versus the fourth quarter of 2024 despite the nonrenewal of a large structure transaction. Net premium return declined primarily due to a change in the timing of certain [ retrocession ] purchases.

On January 1, property cat and more generally short-tail excess of loss renewals were highly competitive with rates down 10% to 20%. Ceding commission increased in proportional reinsurance as supply continues to outpace demand. Despite these headwinds, our underwriting teams performed well by leveraging the strength of our platform to source a handful of new opportunities. These opportunities will reduce the negative top line impact from the [ rate ] pressure.

The mortgage segment produced $1 billion of underwriting income for the year, our fourth consecutive year exceeding the $1 billion threshold. In our U.S. MI business, New insurance return remained modest, and insurance in-force was stable. The underlying credit quality of the portfolio is excellent as illustrated by favorable cure rates on delinquent mortgages which drove favorable reserve development in the quarter, while lower mortgage rates are beginning to support increased origination activity, the current market is still constrained. The team remains focused on underwriting discipline, expense management and perfecting its data and analytical platforms to further optimize the business.

Finally, Investment generated [ $434 million ] of net investment income in the quarter, while equity method investments added another $155 million to net income. We continue to look to the investment portfolio where assets surpassed [ $47 billion ] at year-end to provide a stable recurring earnings stream that enhances the group's overall returns.

As we move past to [ PM ] on the P&C underwriting clock, it is increasingly important to focus on business that generates adequate risk-adjusted returns. For almost 25 years, Arch has perfected its cycle management capabilities and adhering to some foundational principles: One, leveraging a diversified specialty platform to maximize flexibility and reduce volatility; two, embracing a business- owner mindset anchored on delivering a differentiated customer experience; three, using data and analytics to sharpen insights and enhance risk selection; and last but not least, ensuring alignment with investors and rewarding underwriters for profitability, not volume and incentivizing our executives to grow book value per share above all else.

The stage of the underwriting cycle will test our underwriting discipline and acumen. Hard markets are exciting for many reasons, but successfully managing the cycle is equally, if not more, rewarding as the decisions made today will shape future returns.

With our experience, focus, proven track record and capital strength, we believe Arch is ready for the task and well positioned to outperform the sector. This year marks Arch's 25th anniversary. Having been here since 2001, I firmly believe that Arch's culture, driven by our dedicated people is a foundation of our success. So before I turn the call over to Francois, I want to thank Team Arch for another outstanding year and for positioning the company for continued success in the years ahead. Francois?

Thank you, Nicolas, and good morning to all. Last night, we reported our fourth quarter results with after-tax operating income of $2.98 per share and an annualized net income return on average common equity of 21.2%. Book value per share grew by 4.5% in the quarter.

Our three business segments once again delivered excellent underlying results with an overall ex cat accident year combined ratio of 79.5%, down 100 basis points from last quarter. Our underwriting income included $118 million of favorable prior year development on a pretax basis in the fourth quarter or 2.8 points on the overall combined ratio.

We recognized favorable development across all three of our segments and in many of our lines of business. The most significant improvements were once again seen in short tail lines in our P&C segments, and in mortgage due to strong cure activity.

Current year catastrophe losses were $164 million, net of reinsurance and reinstatement premiums, lower than our seasonally adjusted expectations but higher than last quarter, mostly as a result of U.S. severe convective storms, Hurricane Melissa and a series of global events.

The insurance segment's gross premiums written grew 2.3%, while net premiums written declined 4% year-over-year. The decrease in net premiums written was due in part to the timing of ceded written premium accruals related to the MCE acquisition in the prior year quarter and changes in business mix resulting from different levels of net to gross retention ratios. The ex cat accident year loss ratio improved by 80 basis points to 57.5% compared to the same quarter one year ago.

The acquisition expense ratio for the current accident year increased by 150 basis points as the benefit we observed in the fourth quarter of 2024 from the write-off of deferred acquisition costs for the MCE acquired business rolled off.

The Reinsurance segment had another stellar quarter in terms of pretax underwriting income at $458 million. Overall, gross premiums written were flat and net premiums written were down approximately 5.2% from the same quarter one year ago. Our net premium volume was up in casualty and property other than property catastrophe but was down in specialty due to the impact of the nonrenewal of a large transaction, as Nicolas mentioned, and in property catastrophe due to changes in the timing of certain retrocession purchases.

We finished 2025 with an 80.8% combined ratio for the year, certainly an excellent result and the lowest since 2016. Once again, our mortgage segment delivered another very strong quarter with underwriting income of $250 million. Net premiums earned were down approximately $11 million from last quarter, mostly across our CRT and Australian businesses. That said, with fourth quarter new insurance written at USMI at its highest level for the year, and persistency remaining high at 81.8%. USMI insurance in force was relatively flat. The current accident year combined ratio remained low at 34%, considering the increase in new notices of default due to seasonality. The delinquency rate for our USMI business increased to 2.17% in line with our expectations.

On the investment front, we earned a combined $589 million from net investment income and income from funds accounted using the equity method or $1.60 per share pretax. Strong positive cash flow from operations, $6.2 billion for the year helped us further increase the size of our investable assets, which now stands at $47.4 billion. Our portfolio remains a very high quality with a short duration and remains in line with our asset allocation targets. Income from operating affiliates was strong at $61 million due especially to a very good quarter at Somers Re.

As you have heard, the Bermuda government enacted in December, the Tax Credits Act 2025 and designed to incentivize tangible on-island economic activity. At the heart of the act, our qualified refundable tax credits or QRTCs, which are available to us given our operational presence in Bermuda. This quarter, we recognized the full year effect of the 2025 QRTCs, significantly impacting our financial results primarily through the expense ratio for our Reinsurance segment and the corporate expenses line. Of note, included in these numbers are some onetime benefits, which we would not expect to recur in future years.

Going forward, our view is that the impact of the QRTC should be most visible in two places: One, for the reinsurance segment, we would expect our operating expense ratio to benefit resulting in a full year 2026 operating expense ratio between 3.9% and 4.5%; and two, our corporate expenses should also be reduced from their run rate levels and be approximately between $80 million and $90 million in 2026. The QRTCs will also benefit other expense line items, including the insurance and mortgage segment expense ratios and net investment income, but to a much lesser extent.

As a reminder, our pattern of corporate expenses is typically skewed towards the first quarter of the year due to the impact of equity compensation grants. For the 2025 year, our effective tax rate on pretax operating income was 14.9%, reflecting the mix of income by tax jurisdiction. It was slightly below the 16% to 18% previously guided range, mostly due to a 1.4% benefit from discrete items. As we look ahead to 2026, we would expect our annualized effective tax rate to return to the 16% to 18% range for the full year.

As of January 1, our peak zone natural cat probable maximum loss for a single event, 1-in-250-year return period on a net level basis remained flat at $1.9 billion and now stands at 8.2% of tangible shareholders' equity. For 2026, our current estimate of the full year catastrophe losses stands within a range of 7% to 8% of overall net earned premium, similar to the estimate we disclosed last year.

On the capital management front, we repurchased $798 million of our shares in the fourth quarter. For the year, we repurchased $1.9 billion -- or 21.2 million shares, representing 5.6% of the outstanding common shares at the start of the year. We have repurchased an additional $349 million in shares so far this year through last night.

We closed 2025 with a balance sheet in excellent health with strong capitalization and low leverage, giving us plenty of optionality as we continue to put to work the capital our shareholders have entrusted in us. With these introductory comments, we are now prepared to take your questions.

[Operator Instructions] Our first question comes from Elyse Greenspan at Wells Fargo.

I wanted to start with the comments that you guys made on property cat. I think you said that there were some opportunities at 1/1, right, that sort of to offset the impact of the price declines. Can you just expand, I guess, on the opportunities that you saw and just how you expect, I guess, growth in property cat -- during 2026.

I think the opportunities we referred to in our comments, I mean, are not in property cat. I think they come from other geographies and mostly in specialty lines.

Okay. And then my second question was just on capital. You guys -- it sounds like there was a -- the level of -- and the pace of buyback on, Francois, based on your comments, picked up to start the year. I know you guys write, typically, buybacks, right? So it's dependent on capital as well as the stock price. But how should we think about the level trending from here, right, $350 million, right, in a little bit over a month, right, is a pretty big level?

Yes. I think -- I mean, share buybacks are I think, are certainly, as we said, like a good way to return capital. I don't think -- I mean we know it's at a target. It's not like we're saying we're going to return x dollars by the end of the year. But the market, depending on stock price and what we see are in our ability to deploy capital in the business will be active for sure. I mean the pace will vary. It's not necessarily, I'd say, a binary event, whether we buy or we don't buy. There's -- we buy different levels during different times during the year. But I think no question that given that the market environment we're in, I think we -- you should expect us to be pretty active on the share buybacks throughout the year.

And then one last one. On the MCE side, can you just remind us of the expectations for the re-underwriting in terms of the premium impact? And from a seasonality perspective, is that more weighted to one quarter of the year versus another? Or should we think about that being an even impact during the 4 quarters of '26?

Yes. I mean Part B, no question that the business is pretty well distributed throughout the year. There's not much seasonality in it. The re-underwriting question, we touched on it in prior quarters. There is definitely some business that came with the acquisition, primarily in the form of programs that we identified that were going to be non-renewed. We've done that work, that will start to really impact our top line in 2026. And we, hopefully, depending on market conditions, can offset some of that reduction by growth in truly the middle market business that we have on the books. But again, very much a function of market conditions, but that's the current thinking on that.

Next question will be from Tracy Benguigui at Wolfe Research.

On the 10% to 20% rate decreases at 1/1, based on prior conversations I had with Arch, I understand you don't like cat business below a 16% ROE so in terms of sensitivities, I understood going into renewal, you thought that, let's say, if you got a 10% rate reduction, you could still land at 20% ROE, maybe 15% will get you between 16% to 20%. Now the 10% to 20% is a wide band. So how does this all shake out on an ROE perspective for prop cat business?

So overall, I think we still like the cat business. We wrote at 1/1. I think we -- as you said, some areas have been more competitive than others. We've seen Europe being very competitive. I think in the U.S., probably less so compared to Europe and I think we just adjust our writings to the target profitability that is set by region. So overall, I think we were able to retain most of our renewals. We got some very favorable signing from our broker because of the service we provide and the long-standing relationship we have with many of our ceding companies. So I think we still like the business. I think if rates were to continue to go down in the mid-teens, we will have to, on the case-by-case basis realize where it makes sense and where it doesn't.

Okay. And any early thoughts on mid-year reinsurance renewal pricing relative to what you're seeing in January?

So our thought is more about the market in general. I think the competition we are seeing is really a reflection of the excellent results. We've all benefited from in the last three years or so. And the fact that we had only one major cat, which was the California wildfires. I think we -- absent of any other major cat, I would expect the supplies to continue to be there. So I think people should pay attention to the risk-adjusted return going forward because it will be -- it's a big element of how we underwrite the business.

Next question will be from Cave Montazeri at Deutsche Bank.

Given yesterday's move in the market, I was going to ask you about the risk of disruption to your business model from AI and whether you're more likely to be a net beneficiary from AI, getting improved efficiencies and smaller risk selection rather than at risk of disruption, which I suspect is probably more limited to some distribution platforms or maybe the [indiscernible] are more commoditized? I'd love to hear your thoughts on this topic.

Yes. I think I agree with your premise. I think we think of AI as more of an opportunity for efficiency and rather than a threat. But ultimately, the beneficiary of AI will be the consumers as most of the savings and efficiency will be passed on to the insurer. So -- but yes, I think the advantage of being in the specialty market is it's complex. I think it will -- I'm not saying it's impossible, but it will take time for models to learn, to replicate the behavior of the underwriters. So I think what we're seeing is personal lines or SME may be happening there faster than in the space that we are playing.

Got it. And my follow-up question is a follow-up on capital return. I guess, in theory, if there is no growth in 2026, and I hope you guys see growth, but if there is no growth, you could distribute close to 100% of the capital you generate. Is that something you would consider? If not, what's the highest payout ratio you'd consider in the no growth and no M&A scenario?

You're right. I mean, if we're not growing, which, again, we don't know if we will or not, but it depends on the market. But absolutely, if the market -- if we're not growing, our capital needs should remain relatively flat. And every dollar of income that we generate technically could be creating more excess capital. What's our -- do we have to set a target? No, we don't. But we are -- if the market points us in a certain direction and the opportunity is there to buy back more than you would -- you saw us buy back last year, for example, we're happy to do that. It's very much a function of market conditions, and that's something we evaluate on a daily basis.

Next question will be from Mike Zaremski at BMO.

I guess first question on the reinsurance segment specifically. Just I guess a lot goes into the loss ratio, of course, for the segment. if we're looking at the underlying loss ratio trend, it's nudging a bit higher into the low 50s. I guess thinking about '26 to the extent the reinsurance market plays out the way you're thinking in terms of just some additional downward grade pressure, should we continue kind of to nudge that loss underlying loss ratio trend line higher? or the cat load?

Yes. I think on the reinsurance side, I think margins are definitely under pressure. So I think you're right. It comes from the pricing on the excess of loss and also, on the expense side, we're seeing also ceding commission going up. So -- but we still like the business. I think it's -- we have a big, diversified platform. We write the business in many geographies. So I think we believe that we can find ways to continue to attract the market. But yes, the margin -- I mean, they were very high, but the margins are definitely under pressure.

Okay. Great. And I'm going to ask another capital management question just because you all, as you point out, are good cycle managers, you're one of the few that's able or may be willing to shrink in times that you're making a bet that the market is conducive for growth.

So on capital management, is there -- are there any items that would -- other than we can see the shrinking in top line growth [ set ] that could free up more capital than we can kind of see at a high level like the mortgage segment. Is that releasing a material amount of regulatory capital that we should especially take into account?

On that question, Mike, I don't think so. I mean, I think we touched -- well, we certainly have touched on it in the past. I think the overall capital position, the fact that yes, maybe there's some capital that is trapped in the MI companies hasn't really been a factor. I think we've been able to distribute through dividends like meaningful amounts of capital from our MI company to buy back stock to return to shareholders, et cetera. So I don't think that should be any -- should be materially different going forward. The one thing that is capital consumer is the investment portfolio. That's one thing that we have some, I think, the ability to influence capital requirements depending on how much capital or assets we deploy in riskier assets, such as equities and/or private investments. But other than that, I think -- and we can also play certainly on the reinsurance side, whether we buy more or less reinsurance like that -- impacts our net retained premium. But at this point, I wouldn't expect like drastic changes in how we think about excess capital or how we think about returning capital. It's pretty much, I'd say, '26 should be at a high level, a continuation of what we saw in '25.

Great. And just sneaking one quick one in. Nicolas, you said the North America rate environment largely keeping pace with trend, but international, probably slightly below. I think -- I thought that was a bit of a provocative statement since I think the assumption is that the data we're seeing is that lawsuit inflation continues to be an issue in the U.S. So any context you could -- additional color you want to put on kind of why you feel better about U.S. versus international?

Yes. I think that's -- the remarks that I made is pretty based on our own portfolio for the lines of business we write. And remember, the band in North America is more about long tail. We are more of a casualty writer. And in casualty, we've seen rates above trend. So that drives -- and certainly, in the shorter lines, we've seen rates coming down. So I think that -- but when you take the entire portfolio and then we see one offsetting the other at this stage in the market.

Next question will be from Andrew Andersen at Jefferies.

Could you share about a bit what the conditions are in the casualty reinsurance market there? Are you still seeing [ rate ] ahead of loss cost?

So on the casualty side, generally on the primary before we talk about the reinsurance market, I think on the primary side, we feel that rates are still -- we are still getting more rate than trend. It seems that it's decelerating a little bit of what we saw in the last quarter, but I personally believe that there's still pain. I think we still -- we'll see some unfavorable developments in the market for the old years and the prior to 2022. So I'm optimistic that the rates could continue to at least mid trend for the foreseeable future. So that's the background.

When we look at specifically at the reinsurance, I think we've seen -- there's a lot of supply, a lot of willingness for the reinsurer to write the business. And I think the thing that has been new is maybe based on what I said earlier, the ability or the willingness of ceding companies to retain more of the business, which has added -- supply is constant and the demand is stable to down. So that is another layer of competition there.

And that demand comment on stable to down. Was that just on casualty? Or perhaps you could update us on how you're thinking about property demand into midyear?

The one I talked about is about -- is with casualty. I think on property, we've seen on the reinsurance side and especially on the [indiscernible] side, we've seen retention being stable. Only a few [ cedents ] decided to add sub-layers to their program. So I think that -- and on the other property, yes, we're seeing companies based on the -- again, as I said earlier, the excellence results of the last three years, willing now to take on more of the business. So that's a factor there, too.

Next question will be from David Motemaden at Evercore.

I just had a question encouraging to see the level of buyback continue in the first quarter. But I'm just sort of wondering how you guys would frame how we should be thinking about the current excess capital position that you guys have before we start thinking about running through the puts and takes on growth and different sources and uses would be great to get an update on that front.

Yes. I mean, listen, we -- the excess capital is a -- it's a number that changes, it's not static, right? But no question that given the level of results and returns we've generated in the last few years, we did end up accumulating some excess capital. Our #1 mission, we've said it before, is to put the capital to work in the business where we think it makes sense, where we can generate adequate returns. After that, yes, we absolutely are committed to returning the capital to the shareholders but we want to do what's right for the shareholders. And sometimes, they just mean that for given some period of time, we do hold on to the capital for a bit longer. The money is -- has been -- it's been said before on our calls, it's in our pockets. It's not burning anything. It's just sitting there. It's maybe not the most optimal way, right? But it's still -- it's not really [ destroying ] value in a meaningful way. So we're -- listen, we're all about we're doing is right for the shareholder. And if -- in an environment, again, if we don't grow materially going forward or at least for the short term, you could certainly think that you should think of the level of earnings we're going to generate to be additive to our excess capital position, and that gives us more opportunity to return more capital to shareholders.

Great. And then maybe just following up on the casualty reinsurance side. You've seen decent growth there. It's offset some of the pressure on the property side as you guys have managed the cycle. I'm interested, Nicolas, you had talked about, I guess, higher seeds on proportional reinsurance. I was assuming that is for property. But given your answer to one of the previous questions, it sounds like is -- or I guess I'm wondering, are you seeing higher seeds on casualty re, just given the supply demand changes? And do you still view Casualty Re as a growth opportunity in '26 that can help offset some of the pressure on the property side?

To answer your first question. I think it's marginal on the casualty and it works both ways like underperforming accounts, you see [ sitting ] commission going down a bit. It should be more, but -- and [indiscernible] account that everybody is looking for, you may see marginal increase. But really, not -- I should have clarified earlier, not the big factor. It's mostly -- the big swing has been on other property. And to answer your second question on our appetite in the space, I think backing the right ceding company, people like a little bit [ parched ], has a real good understanding of the business and can navigate their way in ultimately pretty favorable in some pockets, primarily casualty market. We think it's something we'd like to do more of. So we -- it's hard to do based on what I explained earlier, but again, our brand in the reinsurance side is good, and we have huge trading relationship with our ceding companies. So we can find ways to -- we certainly first call when new programs are set up or some reinsurers decided to be moved out of the program or reduce. So I think we have a shot at growing going forward, I think.

The next question will be from Yaron Kinar at Mizuho.

Francois, I want to go back to your comment regarding looking to potentially retain more premiums in '26. Can you elaborate on that? Just given the ceding commission rates that are increasing and the supply/demand imbalance, I think pointing to more of a buyer's market, is it that the margin on new casualty and specialty business in insurance is so much better that it's still more economic to keep it than to [ see ] that lower pricing?

Yes. I mean that's part of the equation, right? I mean, just like we -- have the advantage of having both insurance and reinsurance in our platform. So we see both ways. But as a buyer of reinsurance, we're no different than some of the ceding companies that buy from Arch Re and Nicolas has touched on it. It's like, well, yes, sure. I mean I can get maybe a slightly higher ceding commission and that's part of the economics of the transaction, but given the rate increases we've seen on the primary side in the last couple of years that have compounded and certainly and maybe not across the board, but in subsegments of our book, primary insurers or like the business, like the pricing a lot as it is today. So you have to compare the two, am I better off retaining a bit more? Or do I just kind of lock in my profit effectively and just kind of go for the ceding commission.

So I think it's -- as you can imagine, we have multiple reinsurance programs that we evaluate throughout the year. It's not -- every one of them is looked at individually depending on market conditions and what we see what the opportunities are. But I wouldn't say that we're necessarily planning to buy more or buy less at this point, but it could happen. And again, that's something that will evolve throughout the year.

Yes. And I think the other way you can retain more is by switching the structure of your reinsurance, which is to go from a quota share reinsurance to an excess of loss. And traditionally not what the reinsurers like to offer, but based on the competition in the marketplace, having those structures have been more common. So I think that's something we look at as well.

And again, we like the casualty in most of our markets. So it's true also outside the U.S., I think, in both on the insurance and reinsurance, we have a decent size portfolio outside the U.S. Just -- I wanted to make sure we mentioned that.

Yes. That makes sense. And I appreciate that you thought on the restructuring of reinsurance programs. I haven't thought about that as much. My second question, one that's been asked on prior calls as well. Can you give us an update kind of as we look at into 2026, how you rank the appetite and attractiveness of new business between the three segments in terms of capital deployment?

Yes. I mean the question that reinsurance has been the last couple of years, definitely a very attractive market for us, and we've deployed meaningfully. You saw our growth and you saw what we -- how we performed in that market. As the market comes down, it's -- I think it's less ahead of the others, I would say. So if I had to rank them today, I'd say, yes, reinsurance to me is still ahead, but the gap has narrowed. It's come down. Reinsurance is doing still very well, very attractive. But I think the gap between reinsurance and insurance is not as significant as it was a year ago.

In mortgage, we haven't had a question yet on mortgage. I mean, maybe it's a good thing, we love it, right? I mean, it's a great business. It's steady. It's been a great source of earnings for us. Again, we've laughed about it. We talked about prior calls, like which 1 of your 3 kids do you like the most or like the least or not like as many -- as much as the others? We love them all, right? We love all three of our segments. But certainly, I think the fact that the reinsurance market is compressing a little bit, I think, just brings all three segments a bit closer to each other.

Next question will be from Matthew Heimermann at Citi.

A couple of questions. One was just with respect to the MCE -- the re-underwriting, you've been asked about the consequences of that. I'd be curious about the margin consequences of that.

Well, I mean, you'd like to think that the business that we're shedding is the worst-performing business. So absent any other event, you would think that our margins should improve, but that doesn't factor in kind of -- that comment is, obviously, has been true, but the market in front of us will -- may be different than what we had assumed. So on the one hand, no question that the nonrenewals will improve our margins, but maybe depending on where the market what the pricing looks like, it's still a very good market. Middle market business has been, I think, in a good place. I think rates have been holding up and have been improving. So that's been good. But what's margins going forward, it's hard to comment on that.

Yes. And I think some of the program we've shared are actually cat exposed. So the -- the upfront result may have looked okay, but we think it's a bad allocation of capital, and we can get better return by deploying that capacity elsewhere. So I think especially on the reinsurance side. So I think those are the decisions we've made. I mean some of them are running hard, but a few of them that we decided to share were more cost of capital opportunity being better elsewhere. And I feel -- but again, to answer your question, overall, I think we're still thinking that the business could run in Monday in the low 90s.

I guess another question I had was given the QRTCs, any opportunistic investments you're thinking about making in tech or ops or accelerating existing investments?

Not as a direct result. I'd say we will make and have made investments over time based on what we're trying to accomplish and trying to streamline operations, trying to be more efficient and whether it's improving some systems, et cetera. So I think that's -- nothing is different in that respect. The fact that certainly reinforces the value for sure, for us, and it's been there throughout the value having a presence in Bermuda. And I think we want to -- we are committed and remain committed to the island. So that reaffirms that. But in terms of like making, I'd say, direct investments as a result of the QRTCs, I don't think it's the case. It's more based on need and based on what we were trying to accomplish.

And I think it's really an offset to the high cost of doing business in Bermuda. So I think that's smart from the Bermuda government standpoint to make their jurisdiction more attractive to companies like Arch.

Yes, that's totally fair. And then I just -- normally I won't ask a third, but your comment on the demand [ quote ] is potentially changing for cat and reinsurance. Just maybe curious whether or not you are seeing any real changes to subject premium basis in any of your reinsurance treaties at this point that's informing that? Or is that unrelated?

So in terms of -- can you...

I was just curious -- maybe a different way to ask it is over the course of this year, it feels like there have been some companies that have had to adjust down their premium assumptions for their reinsurance book based on updated information from [indiscernible] on the underlying subject premium basis. I'm just curious whether or not you're seeing any noticeable signal or information there that's worth calling out and whether or not your demand comment we should read as risk into subject premium basis next year?

So what you described, I think it's true on the other property companies that wanted to go aggressively into the excess and surplus property side or energy have had to revise to the downside their projections. I think on casualty, what I was referencing is more ceded retaining more, but I think the underlying business is still growing. So that's not -- that would not be the reason.

I think, Matt, just to be clear, we do -- I mean that's something we look at every quarter. So we are very -- we've been very active internally, certainly in 2025, and that will remain making sure that, yes, we get premium projections from the underwriters from the scenes. And we obviously superimpose some of our own views based on where we think the business may end up. So we certainly don't want to be in a position where we have to make a massive downward kind of adjustment because we overshot the mark. So I think we've been very careful and making sure that we remain on top of that throughout the year as we readjust our premium projections based on market conditions.

Next question will be from Meyer Shields at KBW.

Two quick -- you mentioned there were a couple of expense items in the quarter besides the [indiscernible] can you at least tell us where...

Sorry. Yes. I mean the line broke down. So I apologize, I just -- I don't know if it's our side or...

No, it's probably me. You mentioned that there were a couple of favorable expense items beyond the Bermuda tax credits. So I was hoping you could tell us where those showed up in terms of modeling for next year?

Well, I think I touched on -- I mean, the Bermuda tax credits, I think the intent of the comment was that Bermuda tax credits, at the core is very much a function of like how much presence we have in Bermuda and the direct payroll-related kind of expenses. So yes, we have expenses in Bermuda in all three of our segments and also in our investment team. So that is reflected as an investment expense in the corporate line. So again, where it's noticeable, as I said, is in the reinsurance segment and in corporate. In the other places, there are -- I mean we're talking like single millions of dollars. I mean, it's not going to be noticeable to the outside world. So in terms of modeling, I would say, yes, there's some benefits, but it's so -- I mean it could be very -- it will be buried and as part of the overall expense base of either the insurance or the mortgage segment, for example. So that's why it's just hard for us to kind of isolate it.

No, I appreciate that. You're very clear actually. What I'm trying to get a handle on is the favorable expense items besides the tax credits because you said that there were a couple and I just didn't know where they were.

I mean there's nothing else really to point out. Those are -- I mean, sorry for the confusion, but the idea was just that. So there's nothing else to point out that was favorable in terms of expenses that were, again, that we should highlight or identify.

Okay. Fair enough. And then final question. Does the fact that we're finally seeing the non-renewed program business actually hit the income statement? Is that going to have an observable impact on the acquisition expense ratio in insurance?

I would say no. I mean it's -- again, it's -- we're talking, again, $200 million, $300 million of written premium that we're shedding on a written premium base of $8 billion, and you do the math from there. I would not factor in any meaningful improvement in the acquisition ratio for the insurance segment.

Next question will be from Rowland Mayor at RBC Capital Markets.

Can you give an update on the carrying value of the deferred tax asset when we expect to hear some clarification on the ability to recognize it?

Yes. I mean that's been right. So we wrapped up the first year, and we set up an asset in the end of '23 that we started amortizing in '25. So the $1.2 billion is now -- roughly it came down by about $100 million in '25 and we are going to keep amortizing that in '26. And depending on where the law goes in Bermuda, maybe that asset goes away, we just don't know. I mean it's not our decision. It's obviously -- we follow the Bermuda law, but there's been talk that this -- depending on negotiations or kind of what the Bermuda government ends up doing that this asset could be no longer be an asset to us that be either -- late fourth quarter, '26 or maybe early part of '27.

Okay. Perfect. And then I just wanted to ask on your view of M&A in this environment. I know there's been a couple of deals announced in the past month or so. And with how your sort of debt to cap is stacking up, you're kind of naturally deleveraging over time and just anything on leverage or M&A?

Yes. So on M&A, I think our position hasn't changed. So we like strategic assets. So anything that can really improve our platform or add lines of business or help us move forward into something we were planning to do and buy [ just as ] build. I think we look at everything else, but we at this stage, we -- especially in terms of where the market is, I think we -- efficiencies, we -- it will have to be an amazing deal for us to really pursue it. And not saying it's impossible, but I think it's unlikely.

I am not showing any further questions. So I would like to turn the conference over to Mr. Nicolas Papadopoulo, for closing remarks.

Yes. Thank you, everyone, for spending an hour with us. And again, another pretty damn good performance in 2025. And thanking all the employees for their hard work they did to get us there. And I think we're pretty much ready to go for 2026, and we'll talk to you next quarter. Thank you.

Thank you, sir. Ladies and gentlemen, this does indeed conclude your conference call for today. Thank you for participating. You may now disconnect your lines.

Good day, ladies and gentlemen, and welcome to the 3Q 2025 Arch Capital Earnings Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded.

Before the company gets started with its update, management wants to first remind everyone that certain statements in yesterday's press release and discussed on this call may constitute forward-looking statements under the federal securities laws. These statements are based upon management's current assessments and assumptions and are subject to a number of risks and uncertainties.

Consequently, actual results may differ materially from those expressed or implied. For more information on the risks and other factors that may affect future performance, investors should review periodic reports that are filed with the -- by the company with the SEC from time to time, including our annual report on Form 10-K for the 2024 fiscal year.

Additionally, certain statements contained in the call that are not based on historical facts are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. The company intends the forward-looking statements in the call to be subject to the safe harbor created thereby. Management also will make reference to certain non-GAAP measures of financial performance. The reconciliation to GAAP for non-GAAP financial measures can be found in the company's current report on Form 8-K furnished to the SEC yesterday, which contains the company's earnings press release and is available on the company's website at www.archgroup.com and on the SEC website at www.sec.gov.

And now I would like to introduce your host for today's conference, Mr. Nicolas Alain Papadopoulo; and Mr. Francois Morin. Sirs, you may begin.

Good morning. And welcome to Arch's Third Quarter Earnings Call. We delivered record results in the quarter with over $1 billion of after-tax operating income and over $1.3 billion of net income both up 37% year-over-year. After-tax operating earnings per share of $2.77, another record represented an 18.5% annualized operating return on average common equity. These results reinforce the strength of our diversified platform, which enables our underwriter to pursue opportunities and deploy capital across the enterprise. Meaningful contribution from all 3 segments combined with solid investment returns, pushed year-to-date book value per share growth to 17.3%.

Our quarterly consolidated combined ratio of 29.8% reflect excellent underwriting and low cat activity in the quarter. Big picture, our 9 months combined ratio of 83.6%, which include the impact of California wildfires and severe [indiscernible] storms highlights the strong underwriting performance across our businesses.

Now some comments about market conditions. As you have heard on other calls, competition is generally increasing. As cycle managers who lean into the strikes of our brand, including underwriting discipline and using risk-based pricing tools to generate profitable business. We deployed capital into businesses we believe will generate superior risk-adjusted returns. However, given relatively weaker market pricing and an attractive entry point for our stock repurchased $732 million of shares in the quarter. Critically, our strong balance sheet and strong capital-generating capabilities permits us to both invest in our business and return capital to investors. Our objective is clear throughout the cycle to maximize return for our shareholders over the long term.

Importantly, I want to emphasize that we are actively looking to deploy as much capital as possible towards attractive underwriting opportunities. Our playbook remains consistent allocate capital to attractive opportunities that meet our risk-adjusted target returns, pursue profitable growth while prioritizing renewals that meet our return thresholds and take full advantage of our operating flexibility across insurance, reinsurance and mortgage. Over time, this playbook has been key in enabling us to deliver consistently strong returns without regard to market cycles.

I will now provide some color from our reporting segment, starting with our Property and Casualty Insurance Group. Underwriting income for the quarter was $129 million, up 8% year-over-year or nearly $2 billion of net premium written. Our combined ratio was 93.4%, with a current accident [indiscernible] ex cat combined ratio of 91.3%, reflecting the strong underlying margins of our insurance portfolio. The distinguishing strengths of our insurance segment is its breadth across specialty lines. Areas where our team applied deep knowledge and experience to drive better risk selection.

Successfully navigating a transitioning market demand our underwriter employed the capabilities and experience they have developed to leverage our differentiated offerings and market leadership position as we look to drive profitable returns. When compared to the third quarter last year, we grew net written premium in North America other liability occurrence by 17%, supported by growth in dealer market and double-digit rate increase in E&S casualty. Net written premium in our North America property and short-tail book increased 15%.

Growth in [indiscernible] and media property more than offset declines in excess and surplus property. International premium volume was essentially flat. The strategic element of our insurance growth is our middle market business in North America, which was significantly enhanced through the MidCorp and entertainment acquisition last year. As discussed previously, the acquired business provides a significant platform from which we intend to build further scale in the middle market sectors.

Importantly, it is already driving growth and yielding tangible returns. At the outset, we set 3 integration priorities for the acquired business. all over the portfolio, immediate less attractive areas and separate from legacy systems. We have completed the portfolio rollover, remediation and separation are on target. Even though there is still work to do, we remain excited about this opportunity which has been well received by our distribution partners.

Next to reinsurance, which delivered another strong quarter with a record of $482 million of underwriting income. The 76.1% combined ratio was a significant improvement over last year's [indiscernible] third quarter and illustrates our ability to generate attractive underwriting returns. Net premium returns were $1.7 billion, down roughly 11% year-over-year, reflecting current pricing conditions in short-tail and property cat lines and increased retention by [indiscernible].

The diversity of our reinsurance platform means we aren't overly concentrated in any 1 line. For example, property cat, which has been a hot topic of recent industry conferences, represent only 14% of reinsurance total net premium return for the trailing 12 months ended September 30.

Our diversified reinsurance platform, supported by a strong partnership with our broker and [indiscernible] across multiple lines and geographies, further enhances our ability to navigate a competitive environment. We continue to like our prospects in most lines of business and with improving conditions and casualty lines, our agility and ability to create opportunities is an advantage for us in this market. Moving to mortgage, which continues to operate exceptionally well, generating $260 million of underwriting income for the quarter. The segment remains on pace to deliver approximately $1 billion of underwriting income for the year and is a steady diversifying contributor to Arch's earnings.

While mortgage originations remained modest due to affordability challenge. Our high-quality in-force portfolio continued to outperform expectations. We are well positioned to support first-time homebuyers when the U.S. housing market eventually expands. The broader mortgage insurance market remained healthy with disciplined underwriting and stable pricing.

Now turning to investments, where strong earnings and cash flow grow investable assets to $46.7 billion this quarter with net investment income of $408 million, a quarterly record for Arch. We continue to position the portfolio to remain conservative in the current environment with an eye towards generating reliable and sustainable earnings and cash flows for the group.

To conclude my opening remarks, I want to emphasize that we manage our with a long-term land. That was true in the past, it is true today and it will be true tomorrow. [indiscernible], not quarters, and in a transitioning environment, our focus remains on producing superior returns and profitable growth. Our ability to remain successful is rooted in our differentiated customer experience, superior risk-based pricing and the creativity of our underwriting teams, which are empowered and incentivized to generate profitable business aligned with shareholder value.

Today, we are well positioned to outperform in an increasingly competitive market. Our strong capital position gives us the flexibility to invest in the most attractive risk-adjusted opportunities whether in the business or by returning capital to shareholders. This transitioning market is a moment to lead into our strengths with confidence and clarity. I'll now turn the call over to Francois before returning to answer your questions.

Thank you, Nicolas, and good morning to all. Last night, we reported our third quarter results with after-tax operating income of $2.77 per share and an annualized net income return on average common equity of 23.8%. Book value per share grew by 5.3% in the quarter. Similar to last quarter, our 3 business segments delivered excellent underlying results with an overall ex-cat accident year combined ratio of 80.5%, down 40 basis points from last quarter.

Our underwriting income included $103 million of favorable prior year development on a pretax basis in the third quarter or 2.4 points on the overall combined ratio. We recognized favorable development across all 3 of our segments and in many of our lines of business. The most significant improvements were once again seen in our short tail lines in our P&C segments and in mortgage due to strong cure activity. Current year catastrophe losses were low at $72 million, net of reinsurance and reinstatement premiums in what is typically our most active quarter for catastrophes.

The Insurance segment's net premiums written grew by 7.3% compared to the same quarter 1 year ago mostly due to the contribution of the mid-corp and entertainment unit for a full 3 months this quarter compared to only 2 months from the same quarter 1 year ago. The ex-cat accident year loss ratio improved by 10 basis points to 57.5% compared to the same quarter 1 year ago. and the 220 basis point increase in the acquisition expense ratio is primarily due to the benefit we observed in the third quarter of 2024, from the write-off of deferred acquisition costs for the acquired business at closing under purchase GAAP.

Profit commissions paid for prior accident years also explains some of the increase from the same quarter 1 year ago by approximately 40 basis points. The Reinsurance segment produced its best quarter ever in terms of pretax underwriting income at $482 million, a direct reflection of the strong underlying profitability of the business written over the last few quarters and the absence of significant catastrophe activity in the quarter. Overall, net written premium was down by approximately 10.7% from the same quarter 1 year ago.

Of note, approximately 75% of the overall reduction is the result of 2 large transactions from the third quarter in 2024 in our specialty line of business that did not renew this quarter. The absence of reinstatement premiums also negatively impacted our top line this quarter. Our ex-cat accident year combined ratio remained very strong at 76.8% and reflecting the robust level of underwriting margins in our book of business.

Once again, our mortgage segment delivered another very strong quarter with underwriting income of $260 million. The improvement from last quarter was primarily due to a lower level of ceded premiums as a result of the tender offers we executed in the second quarter for 2 Bellemeade [indiscernible]. There was also a slight benefit due to a higher level of cancellations on CRT transactions. The delinquency rate of our U.S. MI business increased to 2.04% and in line with our expectations due to seasonality in the business. On the investment front, we earned a combined $542 million from net investment income and income from funds accounted using the equity method or $1.44 per share pretax.

Net investment income remains an important source of income for us. And with the help of strong positive cash flow from operations, $2.2 billion in the quarter, it should continue to grow in line with the size of our investment portfolio. The allocation of our portfolio remained neutral relative to our targeted benchmark. Income from operating affiliates was strong at $62 million due especially to a very good quarter at [indiscernible] REIT.

Our operating effective tax rate on a year-to-date basis stands at 14.7% and reflects the mix of income by tax jurisdiction. It is slightly below the 16% to 18% previously guided range, mostly due to a 1.7% benefit from discrete items. As of October 1, our peak zone natural cat probable maximum loss for a single event, 1 in 200 year [indiscernible] return level on a net basis remained flat at $1.9 billion. and now stands at 8.4% of tangible shareholders' equity. Our P&L remains well below our internal limits.

On the capital management front, we repurchased $732 million of our shares in the quarter and added $250 million to this number so far in October. On a year-to-date basis, we have repurchased 15.1 million shares, representing 4% of the outstanding number of common shares at the start of the year. As Nicholas mentioned, our balance sheet is stronger than it's ever been and it remains a significant asset for us as we focus on executing our playbook and leveraging the value of the Arch brand as we move forward in this dynamic market.

With these introductory comments, we are now prepared to take your questions.

[Operator Instructions] And your first question will be from Elyse Greenspan at Wells Fargo.

My first question is just on capital. the level of buyback went up in the quarter. So I guess my question is maybe two-pronged. Just how do we think about the level of buybacks going forward just given the strong earnings this year? And then I know last year, you guys had gone the route of a pretty substantial special dividend. So is this year [indiscernible] of buyback versus a special in terms of capital return?

The last one, I think it's -- for us, we think of those as 2 options, but most likely not going to do both at the same time. So in this current environment where, yes, we certainly see our earnings profile being very strong, and we think there's -- as we've seen, right, limited opportunities for grow -- for us to grow aggressively in the business. So capital return to shareholders will be will remain a focus. And given the stock price, I think share buybacks will be our preferred method going forward. at least for the short term, we'll see how things play out moving forward, but that's obviously something we talk with our Board on a regular basis. So I'd say that's kind of where we're at. And again, balance sheet remains very strong. So is there room for us to do more buybacks as we move forward. And I think the answer is definitely yes, and something we'll keep evaluating as we move forward.

And then my second question is just on the insurance premium growth. So we've annualized the mid-corp deal, but there is going to be some impact from nonrenewals there. And and obviously, just the overall market, which is softening in spot. So how do we think -- as you guys think about pricing, the combination of the nonrenewals on MidCorp, how do you guys see the premium growth outlook for your insurance book from here?

On the insurance side, I think we're still very much bullish about the business. I think we like the market we trade in, and we would like to grow and we talk about profitable growth. That's what we're really focusing on. And you have to divide the market in 3 broad categories. First one being areas where we still see some rate increase, like casualty will be the main one and the middle market business where we think with the rate increase, and I think we have the propensity to grow. Then the second segment, which is the one that have witnessed headwinds in the past, which is mostly professional lines, whether it's D&O or cyber. The good news there, I think the rate decrease has really moderated on the GO, pretty flat and on cyber, they're signed that they are moderating, so that should be less of a headwind going forward. And third, it's really the property, whether it's the large account property and the E&S property. The good news for us is that we don't write much of the [indiscernible] property business. And we have a relatively small footprint on the E&S side, which is really under a lot of pressure today. So I think overall, if I look at the outlook for us and our positioning in the London market as well. If I look at the outlook, I would expect us to have the ability of the insurance to grow better than the market we play into.

That's helpful. And then just one last one. There's a hurricane out there right now with the potential to impact the Caribbean. I don't think there is a lot of insurance or even reinsurance exposure there. But do you guys just have high level -- some high-level thoughts there just on potential exposure?

I think it's just too early to tell. I think for sure, it will be -- it's going to be a looks like a big event potentially for Jamaica. And we're a big enough to have repercussion that goes effect the Caribbean overall, too early to tell.

Just quickly, I mean, obviously, depending where it hits like some of the resorts might be the insured values that might be more that we might participate on, just not knowing at this point where, again, where things may land, but I think that's -- in terms of where the exposures are and what could be impacted, that would be the focus area, I would say.

Next question will be from Andrew Kligerman at TD Cowen.

So maybe starting with -- you just touched on growth in insurance with a lease, maybe shifting over to reinsurance. You kind of kicked off -- I remember in the first quarter, you thought that -- I think you did adjusted net written premium growth of 6% or 7%. You kind of repeated that in reinsurance in the second quarter. And then this quarter, you talked about the 2 deals and the reinstatement premium is kind of creating a bit of noise. So Part A is, what would the normalized growth have been in the absence of those items? And the Part B is, how are you thinking about growth going forward in that segment?

Well, I'll take the first part, and then maybe Nicolas can [indiscernible]. I mean the normalized growth absent call it, these kind of one-offs or again, and they happen, right? We talked about it in the past, it's reinsurance can be lumpy. There's deals that happen, they don't happen. The timing of it is not always predictable. But yes, the fact that with a little bit of the headwinds that we're seeing, again, coming from a very high bar on the property, property cat [ 7 1 ] renewals. I'd say our growth in the quarter might have been around, like, call it, a decrease of 3% to 4% not the 10% that we -- that is -- was reported in the quarter.

On the outlook for growth on the reinsurance side, so if you think of reinsurance is pretty much the same outlook as insurance. I think you have [indiscernible] on the shorter lines. But I think you're seeing a rate increase in this location on the casualty lines that could provide opportunity. So I think I would say a similar picture, but for, I think, a big headwind is like [indiscernible] company like the business like we do. We like the insurance business. So after a few years, there's less fear in the marketplace, people feel better about their balance sheet. So what we're seeing is company retaining more, which is -- creates a significant headwind for the reinsurance group. I mean, by doing so, the they either written the business or move very often you [indiscernible] to an excess of loss position that present additional opportunities for us. And I would say the margin on the excess of loss is usually better than the margin on the quota share. So I think we may see a different makeup of the margin going forward.

I see. And then maybe shifting back to insurance. As a specialty writer and especially with pressure in E&S property these days, just more from the industry perspective, and you touched on your view of how Arch is going to do, but maybe again a little bit. But how do you see E&S premium for the industry playing out over the next few years? I mean not only have we've seen such tremendous growth over the last few years, but is it possible that E&S premium as an industry starts to decline over the next few years? So outlook and then just Arch in E&S over the near intermediate term as well.

So I think the outlook of the industry, I think, is -- I think it's a tale of 2 stories. I think on the casualty side, I think because of what's happening in the market and because of the issues people are having with the prior years, and I think my view is that the trend of more of the business moving to the excess and surplus side where you have freedom of rate and form and where you can add exclusion that take a much longer time to be able to do on the admitted side. That will continue. On the shorter line we could see some of the shared [indiscernible] and cat exposed business going back to the NBD market as we've done historically. So I think Hard to predict, but I think the fundamental shift, which is been driven by casualty that I expect to continue.

I see. And then March, how do you see yourselves? Do you see gaining share on the short tail and the casualty, respectively?

I mean the short term will be a challenge based on what we see in terms of the pricing. I think we are more optimistic on the casualty side where we've been underweight in the difficult years. And I think we're -- I think our [indiscernible] have been holding pretty well. So that gives us confidence in how we price the business forward. So I think that as rates continues to improve, I think that gives us an opportunity certainly to do more at a time maybe where our competitors are still kind of a code up into looking at the right things they did in the earlier years.

Next question will be from Josh Shanker of Bank of America.

Yes. I don't want to pigeon hole you too much, but obviously, there's a lot of buybacks in 3Q. Some companies don't do buybacks in 3Q because they're worried about the outcome of the hurricane season. But then trying to gauge your appetite for 4Q and maybe 1Q, when did you start buying back? And how much were you buying the whole quarter? Or really you're able to do $732 million within about a month ending up quarter.

Yes. I mean it's pretty consistent throughout the quarter. I think there was a little bit more in September, and that's kind of, as I mentioned, I think we've been active in October as well. I think, again, it's -- I think I touched on it on the last call. I think no question that some years ago, we would have said we would not buy during the hurricane season, but I think Arch is different today than it was back then. I think Arch is much more diversified, much stronger, less exposed on a percentage of equity from a massive or a P&L even at the 1 to 250 or below. So for all these reasons, we felt we do feel and felt a lot more comfortable buying back during the wind season -- and I think, as I said earlier, I think we're going to keep pursuing that opportunity as we move forward.

And you're not worried in the past you've said part of the reason to do a special dividend was because you just don't think you can return as much capital as you desire to through the buyback of the limitations as you look out into the end of this quarter and beyond? Do you think you can satisfy every bit of capital return you need through repurchases?

It's a daily -- we look at daily. I certainly think we can do more capital return what can we -- I mean, we don't set a target for ourselves, right? So I think it's an ongoing process, but there's a lot of liquidity in the stock right now, and we're able to buy back stock. We think we perceive to be a very attractive price. And we'll do as much as we can, how much we think is right, and then we'll see where we're at.

Next question will be from Tracy Benguigui at Wolfe Research.

This is a bit belated that it's been a while since I've been in your call. Congrats on your S&P upgrade back in June. So capital is so topical. My question is, while it's great that you have a AA- rating, it's a new category, you now have to hold AAA capital back when you were rated A+, you only had to hold AA capital. And I realize a lot of that was just model methodology driven. But my question is, how important is it to you to stay in this new rating category when you're thinking about your ability to deploy capital?

I mean is it critical? I mean it's not, but it's certainly an advantage, and we've seen the benefits of that already in some places, particularly in Europe. So no question that the new higher rating, I think, has been well received, and we're able to benefit from that. But you're right. I mean it comes at a certain cost. I'd say, though, that the S&P capital model is only one of the things we look at. We have our own internal view of capital. We have our -- I mean there's other rating agencies that we look at as well. So all in, I think our capital position is -- remains very strong. And it was always strong. And again, we try to optimize within all those constraints from all the rating agencies and regulators to look at us. But the AAA level of capital that you mentioned is really not something that is not really new to us because we were, I'd say, already at that level. So that's kind of it wasn't an additional kind of burden or initial step we had to meet.

And I think we don't only manage one point. I mean usually, we look at AA, AAA. And for a while, I think we were a little bit in the penalty box because of the MI. So I think now I think it's more -- I think it changed completely our capital structure. And also, I think it's been helpful on the some of the MI CRT and SRT where the buyer are extremely sensitive to the rating of those layers and they actually pay a differentiated price for better ratings. And as Francois said, I think in Europe, as we lean to -- especially on the reinsurance side, but also on the insurance side to strength is really casualty, professional lines. And as we lean into those markets, I think having a AA- rating is an advantage.

Okay. Do you view it just opportunistically? Or could you see a scenario where you could reduce capital and live with the back to the A+ rating?

It's obvious -- I mean it's a trade-off we constantly look at, right? I mean how much capital do we need to hold on the margin to get the incremental rating right now. We already have the capital. We're not -- we're in a very strong capital position, but if down the road, it can -- conditions change. The question you asked is something that we've asked ourselves many times in the past, like how much capital do we -- is it really worth it to us to hold that incremental level of capital. But right now, given our capital position, again, given the strength of our earnings, the earnings profile that where we generate internally the capital on a regular basis, I think we're in a very, very good position.

Okay. My next question is you said you like insurance and you're bullish on the business, and you mentioned casualty rate increases. Casualty can mean a lot of things. So once I strip out some of the casualty lines like you mentioned professional lines, what is really left -- what you're left with in terms of like attractive pricing as GL commercial auto and excess liability, which includes auto. So I'm wondering where you're seeing the opportunities? Is it more auto-orientated? Or if you could just let me know the different casualty lines that are attractive?

So I think the -- one of the opportunities on E&S casualty side, which would be excess liabilities. So that will include some auto, but usually, we don't focus on the auto on the E&S side. And then we have other franchise like [indiscernible] business, like national accounts or constructions, which are casualty lead lines with heavy components of workers' comp, general liability and a lesser amount of auto. So those are the places where we think we have the ability to grow.

Next question will be from Ryan Tunis at Cantor.

Just wanted to go back [indiscernible] it was an interesting comment that on the reinsurance side, you're seeing [indiscernible] proactively retain more. And I guess I'm curious, when I look at like the facultative property decline of 17% this quarter. How much of that is, I don't know, are you guys proactively walking away or decline in exposure as opposed to rate because I was thinking it was kind of more rate driven, but that comment maybe think it might be more volume-based.

No, I don't think really we are cutting back. I think at this stage, I think we -- on the other property, which I think you should clarify other property line of business. I think the main factors there is a couple of our clients on the E&S side of the business and on the reletting more of the business at this stage. So that's really -- we -- we would like to do more. And also, I think -- let's not forget the rates are also going down. So the -- some of our cedents are also revising some of their ceded premium to the downside. And so those are the 2 components. Then their ability to wanting to retain more of the business and also they're reforecasting their growth downwards, which impact our insurance volume.

I think just to confirm, I mean, it's no question that the rate environment is down in property. There's also a drop in exposure, but the -- just to be clear, let that drop in exposure is typically not our decision, right? It's the seeding decision -- there are some situations where, again, they decide to keep it net or they use a different structure, but we still like the product. We still like the line in most of what we do, we like a lot. And any reduction in exposure that you see that we experienced is generally, at this time, more because the teams choose to do something different, not because we decide to walk away.

Got it. And then just a follow-up. You guys talking about the transitioning market. I think a lot of times, we just want to focus on pricing. But I'm curious what type of lines or it might be in primary because there's business going back to admitted and just some of the more bad stuff stays E&S? Or facultative, I guess, it could be [indiscernible] in just choosing to, I guess, just continue to [indiscernible] stuff where they feel like there's an arbitrage. But like are there pockets you point out that are kind of particularly challenging to underwrite this type of market where you really got to kind of cross your Ts and dot your Is.

I think it's a competitive market in. So I would say a lot of the market today, you get a lot of anti-selection. So we developed a lot of data analytics tools to really segment our portfolios and provide underwriters, some really granular information at which price for which risk, which limit for [indiscernible] underwriting the market -- we are bullish because we have those tools. I think if you don't have the tools that would be a lot less bullish about our ability to write profitable business going forward.

The next question will be from Mike Zaremski at BMO.

Pivoting to the mortgage side of the business, I feel like when we were to quiz most people and ask them what the historical 5-, 6-, 7-year loss ratio was most people wouldn't guess it was 0 and obviously, there was unique circumstances in the past 5-ish years. But just curious, and we know it's [indiscernible] family business. But curious if your views on a normalized loss ratio is [indiscernible] past if we think about kind of the current cycle and the next cycle coming.

Well, not knowing what the next cycle will look like. I think we'd be speculating. I think we have talked about a normalized loss ratio in the 20% range across the cycle. No, I think -- well, we have said and we believe strongly that all prices are the key driver of what -- performance looks like for the mortgage book. And so far, I mean, home prices have remained very strong. I mean there's been some pockets, there's been some home prices decline. -- some home price declines in a few areas, but across the nation, across the U.S., you can see that when prices remain very strong. So that, I think, explains in large part, I'd say, the outperformance of the mortgage business relative to what we would have thought over an extended period. Does that remain the same going forward? Again, there's a lot of macro factors that will come into play on that. But as long as -- and we do have strong beliefs that based on lack of inventory and kind of there's a lack of housing in the U.S., I think, will support home prices for the foreseeable future and on that basis, we'd like to think that the performance will remain strong. Does [indiscernible] up a little bit over time, maybe a little because it feels like it's been really, really good for a long, long time. But the time being, again, we've said it, and we still are very, very, very bullish about the mortgage business because it's been truly a terrific business for us.

And the underwriting remains excellent. I think if you look at the FICO distribution, I think they are getting better. So that will drive a better outcome.

Got it. Moving to capital management. Clearly, you signaled buybacks are high on the list. Maybe you can just give us an update. Has anything changed quarter-over-quarter on maybe inorganic opportunities. Is U.S. small commercial still something that's on the retail small commercial still high up on the wish list?

Yes, the wish list is long. I mean we -- but by the same token, we have a lot that we are working on and can work on. Middle market is obviously a big focus for us. We've talked about other areas that we'd like to grow in. But as you know, these M&A opportunities, they don't happen that often. They take a while to materialize and -- so we're not going to hold a ton of excess capital just in the -- on the potential that we might do an M&A transaction. I mean our leverage ratio is it's maybe the lowest it's ever been. So we've got a lot of flexibility. The balance sheet is strong. We got -- we got some excess capital. So we got a lot of flexibility in our ability to execute on that, I think, is really good. So if there's other things that we can get our hands on that would make us better, we'll be happy to do that. But in the mean, there's a lot that we already have that are -- that is -- we can generate good earnings as well.

Got it. And maybe just sneaking one last one in since you guys provided on market commentary. And Nicolas, you provided a good view of kind of how to think about the E&S marketplace going forward. Do you have a view on what has also been the kind of exponential growth of the MGA marketplace and kind of how it's been impacting Arch [indiscernible] maybe the industry? And do you view the marketplace growth to continue to grow much faster than the rest of the market?

Interesting subject. I'm personally bearish on the MGA, I think historically, strong both in the MGA except for a few exceptions, didn't turn out to be good. I think the lack of incentive alignment, the delay and the information to the insurance carrier or the reinsurers I'm not bullish on that model. So I think it's been the flavor of the month the last few years and I'm still a little bit questioning what the outcome is going to be

Next question will be from David Motemaden of Evercore ISI.

Just had a question obviously, still very good reserve releases. Just focusing in on insurance and reinsurance specifically. Could you talk about the movement between long tail and short tail lines between those 2? Any sort of things to point out on that front.

I'd say nothing unusual, very similar to prior quarters. There is a little bit of adverse on casualty. I mean, nothing that stands out. It's a couple of -- could be 1 accident year within 1 business unit, the 1 line of business. So small adverse on casualty, which I don't think is surprising, at least to us. But when we look at the overall picture around kind of where -- how the reserves are performing or quarterly actual versus expected, which is still showing favorable, meaning lower than expected, I think, gives us a lot of comfort there. So we're reacting to the data. And in some places, there is no question, there's trends that are showing up that we're addressing. But big picture, the short tail stuff did extremely well as it has for quite some time, and we'll keep a value [indiscernible] every quarter.

Got it. And then just taking a step back, the mix shift to casualty lines in both insurance and reinsurance. At least if I look at it on an earned basis, that definitely is up a bit year-over-year hasn't really increased much, I guess, over the past few quarters. Is that having any bit of an impact at all on the underlying loss ratios in either segment? And how should we think about that going forward?

So I mean, at some point, you will, but because I think the loss pick on the casualty line is a bit higher than the last peak on the short-tail lines. But I think the shift, the mix hasn't really changed from [indiscernible] at this stage, I think. So I think down the road, I think it might.

Next question will be from Rob Cox at Goldman Sachs.

Just curious, as you start to renew the MCE book, anything interesting you're seeing either on the elevated or the non-delegated side. And how far are we through the nonrenewals on the programs book?

So I think we -- what we've seen so far, and I think we've renewed the entire book has been transferred to Arch, I think we I'm personally very pleased with the -- what we've seen so far. And I think the stickiness of the business, the ability to provide additional lines of business or distribution partners to be more relevant to them. The property expertise that in the admitted quality business that we really didn't have that we acquired, all those assumption that we had made at the time of the purchase turned out to be true. So I'm actually very, very pleased with the strategic decision we made to go through the acquisition. On the dedicated side, the MGA, I think we knew we didn't do the deal because of the NPA portfolio that was coming with the acquisition. So I think we started the remediation. And there, I think we is pretty much what we expected. So -- and I think really it takes more time than you think because all these MGAs have not this period. So I think we'll see the impact really in 2026 of the of the nonrenewal of the -- this period that we sent a number of those MGAs this year.

Got it. And then just wanted to follow up on credit. I mean, just given the mortgage book and the investment in Coface and I think a relatively larger private credit book that you guys have. Any thoughts on the credit environment and any way you're leading into or out of just given some of the noise in private credit?

Yes. I think you got to be careful, I'd say, what we're looking at. No question that certainly maybe the headlines around subprime auto loans not performing well. I think that's a totally different type of customer than what our borrowers would be on the U.S. MI front. So I think that -- and we're not seeing any of the same kind of results and I guess, the proof is what we reported this quarter. So again, very specific around kind of the type of borrowers in the U.S., the trade credit world. No question that there's been a couple of insolvencies that have made the headlines that we -- Coface, we don't know, but may be exposed for them to work on, but there is no question that when these types of events happen. People will start to think a bit harder about the dependencies and the credit and lines of credit, they extend, et cetera. But that's not unusual. So at this point, we're very, very comfortable with the exposure we have. We understand it well. And obviously, we look and monitor all the external data and the trends that are happening. But so far, there's nothing really that stands out that we think we have to adjust our thinking or our strategy.

And more specifically on Coface, I think is short-term credit. So the game here of the underwriting is really as you are aware of a weaker credit is really to over time, cut your line to that particular credit name so that when the [indiscernible] will happen, your exposure is much less. So I think they played that game really, really well. And I don't know about the latest insolvencies, but historically, they've been very good at that.

Next question will be from Alex Scott at Barclays.

First one I had was just circling back on Rob's question on the remediation. Could you frame for us at all, like how much impact that could have on the Insurance segment. I just thinking through trying to dial in premium growth estimates and knowing how much some of us missed or reinsurance growth this quarter from not knowing about the transaction. I just want to make sure I'm layering in enough for this lagged remediation impact.

Yes. So specifically on the programs we acquired, the premium that we've identified and has been -- will be nonrenewed is roughly $200 million. And again, Nicolas said, the notices went out, and then there's a notice period and then GA has 3 to 6 months to find another carrier and some are more -- I mean, some are more successful in getting a replacement sooner. So some of that may actually start happening in the fourth quarter. I don't have the precise like projections on when it's going to hit the top line in each of the next few quarters. But just at least give you an idea, like, call it, $200 million part of $1.5 billion to $1.6 billion book is -- which was the overall NCE premium volume that's kind of the impact that we expect to see the flip of that, though, is the middle market business that we really was attractive to us was really what we were trying to get has done very, very well. So the rate environment both on casualty and property in that business has been very good. And we just came back from a couple of industry conferences where the business partners are very supportive, and they are very happy to do business with Arch. So we'd like to think that some of that kind of headwind in terms of giving up or nonrenewing some of those programs, we can make up some of that, at least in the middle market side.

Got it. Helpful. Second question I had is on the reinsurance business in casualty specifically. The repricing efforts, I guess, a lot of it's on the quota share, the actual underlying primary taking rate. Can you characterize what you're seeing there? I mean, are the underlying primaries taking enough rate where it's in excess of loss cost and it's actually building improving margin in there. Is that why you're speaking more optimistically about it? Or is it still pretty obviously, high loss cost environment. So I'm just trying to get a feel of whether that's actually improving or not.

So I think you got it right. I think we believe in casualty in general, we're getting more rate than the last cut, and it's an elevated loss cost. So I think that's what -- if you back on the reinsurance side, if you back the right specialty underwriters, people that manage their limits well, avoid some of the heavy auto or other difficult class of business, I think you would want to do more business with them. And I think over time, we expect to be able to write more of that business.

Next question will be from Andrew Andersen at Jefferies.

Maybe you could just expand a bit on how you're thinking about 1/1 prop cat renewals. Do you still see returns of kind of 20% here on this line? And how are you thinking about ILS impacting kind of return levels and industry capital?

On the cat side, we remain bullish. The outlook is bullish. We like the margin and maybe a couple of data points. The market really picked in July 2024. So a little bit of a year ago. And I think in 2025, market -- the price went down between 5% and 10%. So we are into our second round of rate decrease. And depending on the region, the increase that we witnessed us from 2021 to 2024, some of those rate doubles. So I think we are in a good place. It depends on the region. But generally, we remain optimistic that the business is attractive. There's more demand. We had more demand last year. We expect more demand to come to the market in the U.S. on an international basis. So overall, we think despite pressure -- expected pressure on the rates, we will remain -- we think the margins are still very attractive.

Next question will be from Meyer Shields at KBW.

Just in the past, you've talked about ramping up some spending associated with MidCorp. I was hoping we could get an update of timing and maybe amounts of increased spending?

Well, increased spending, I think, was more -- the focus -- question that we got -- I want to call it a bare bones organization, but the people that transferred back in August of 2024 was, call it, primarily underwriters and claims people, right? So that was the bulk of the staff, the transferred and what we talked about at that time was that, yes, we would need to hire to reinforce our capabilities in terms of actuarial data analytics, and a few support functions here and there. So that, we knew it would take some time. It's a competitive job market. We've been able to address some of that, too. But I think ultimately, it's still -- I [indiscernible] the expense ratio on the OpEx side, I mean we're -- we can run the incremental MidCorp business at a more efficient or lower expense ratio than we had pre the acquisition, given the synergies and kind of some of the infrastructure costs that we can spread to a bigger base. So I think we still have a few, I'd say, opening that we're trying both on the underwriting side and on the kind of support functions that we're trying to fill. But we've done a lot of the work has been done in the last year, and it's showing, right? The business is doing well and we're able to execute on the strategy and try to grow in some specific areas. So we're -- again, a little bit of work to do, but we're in a good spot.

Next question will be from Brian Meredith at UBS.

Two quick ones here. Just going back to the whole MCE MidCorp in the program business runoff, the underlying loss ratio improvement in insurance, is that a direct result of some of the actions being taken there? Or is that something else? And therefore, as we start to see this run off, should we start to see underlying loss ratios continue to improve in insurance?

It's more the latter. The impact of the nonrenewals has not really come into play into our -- on an earned basis. So the improvement, again, somewhat not huge on this quarter, but I think the -- there -- hopefully, there should be some benefit as this business runs off, and we'll see some improvement or at least some stable loss ratios.

Great. And then first of all, I wonder if you could talk a little bit about the substance base tax credits that Bermuda came out with, I think it was the end of September, what that impact could potentially be for you all?

A bit early to tell. No question, yes, the consultation paper is out. Comments have been submitted. We have had meetings with obviously the -- as an insurance community with the government expressing our views. The biggest kind of I'd say, remaining item that we don't have clarity on is on the transition credits. I mean at what pace will these kind of credits be allowed to be reflected starting in 2025. So that is still to be determined. There's work being done on that right now. We expect to have clarity in the first, call it, first half of December. Clarity almost finality because it has to be enacted before the end of the year for us to be able to reflect that in our financials. But to your question, Brian, I think it will be substantial, we hope. And when we have like the [indiscernible], I mean, we'll be very quick to share that with you all and give you a bit more color on what that might mean for us.

At this time, I'm not showing any further questions. I would like to turn the conference back over to Nicolas Papadopoulo, for closing remarks.

Yes. Thank you for spending time with us this morning, and we're looking forward to talking to you next quarter

Thank you, sir.

All right. Well, let's get started, I guess. Everyone find a seat. Okay. We'll see if you're joining us right now, are we live? Okay, we're live. So thank you for joining us at the Bank of America Global Financial Services Conference. If you're listening in here, this is the Arch Capital Group session. We are really -- it's a treat to have Arch Capital Group presenting obviously, a U.S. listed company, which is an exception here at the conference. We have Nicolas Papadopoulo, CEO; Francois Morin, CFO, to talk about what's going on in Arch here and thank you all for attending, and let's get started.

So for people who are unfamiliar with Arch story, I just want to say a few little background, Arch was one of the so-called class of 2001 start-ups that was formed out of the hard market that was spurred by the '97 to 2001 underwriting crisis and the fall of World Trade, a large $20 billion loss in a single day. Since that time, the end of one, Arch's compounded book value per share to 15.5% CAGR, which I'm pretty sure is the best of any insurance company in any market. I mean, someone might show me a 23-year CAGR that's better than Arch. I don't think it exists. And I'll be happy to if we've been wrong, but I don't think it's true.

The company, from a standing start of nothing, the company has grown its equity to $23 billion. It's an investment portfolio of $45 billion, and it's also returned $8 billion of capital to shareholders over that same period of time starting in 2007. The growth has been almost entirely organic, intangibles are barely anything. And even though Arch has done a few deals at very choice prices. It's also worth mentioning that the success is not part of the past. The ROEs today are better than the long-term ROEs meaning what you're delivering now is in excess of the past record. And so it's a pretty good time for Arch.

I mean the question is how did you do it? And why is it going to continue? And so I don't know how you want to take it, but Nick and Francois you have some thoughts on that matter.

Yes. I think the -- the story of Arch is it's a company that was created around a few principles. And one of the key principle is cycle management, being diversified. So having the ability when you cycle management to look for not being like in one line of business, but I mean the ability to arrive cross lines of business. It's a company that really a specialty, a global specialty insurer and reinsurer. And I think in the journey over the last 25 years, we added a mortgage insurer in the United States. But I think the principle that we have today, I think they're very similar to the original principal that we had back then.

I think the company was created by -- I started to work at Arch 25 years ago when the company was recapitalized back in 2001. And the gentlemen that at the time hired me Paul Ingrey believed and brought with him this culture and this strategy of cycle management. At the time, he teamed up with a little bit later Dinos Iordanou, which brought with Bob Clements, the insurance side of the business. So being able to provide sustainable value proposition to our insured and distribution partner being specialized and being able to -- in the specialty business to have limited competition.

And I think that has been really the philosophy that has been behind us. We've been a very strong steward of capital all along. I think we -- the thing that makes us different, maybe from others. We talked about it this morning with some of our investors is really we allocate capital to underwriting units at the end of the year. A lot of people give underwriters a budget and they say this and deploy the capital to the best of our ability. I think the way we manage capital is we -- we tell people with a lot of oversight from management. But ultimately, we have a culture of a business owner, people have a business plan to execute. But ultimately, we never tell them they have a budget to meet.

I think the success of that has been to be able to be agile enough to -- within the holding company to deal with the excess capital in another form that deploying it in the business where the returns were not attractive. I think culture is a big deal. I think we have a culture that's really a culture of collaborations where I think you work at us, that's my case. I think I've worked on us for 25 years because I value working with others. I think we have a lot of smart people, but I think as a group, we are a lot smarter than we were in any individuals. If you have a very bright person that comes to work for Arch and wants to do it on his own, he probably won't work. So I think I don't know that capture...

You said it all. I mean it's well done. I mean, again, back to the -- again, just the cycle management is one thing I think that many companies talk about, but I would say the where we may be a bit different is, again, again, is on the diversification part where we have 3 distinct segments and we think of ourselves as capital allocators, right? We think of ourselves as, okay, where is the best opportunity to deploy the capital? We've gone through a very good period the last, call it, 3 to 5 years in the P&C space in general, but that was different before that when the market was definitely softer, more competitive mortgage insurance became for us really the most attractive opportunity at that time, call it, in the 2016 to 2020 years.

So there's a time not everything stays static. So things change over time, and it's our role to react to those market conditions and not be afraid to pull back if the market just isn't -- doesn't meet our expectations in terms of returns and vice versa. When the market is more than it meets a lot of our -- there's a lot of green light flashing, we're more than happy to really step on the accelerator and be very aggressive in those lines of business.

Yes. I think the secret sauce is a combination of leadership of Arch and the people that lead the various units having combining, I think, a macro view of where the market is and the attractiveness of the overall market or deferred class of business within that market and the micro view, our underwriter having all the information that they need to make decisions once at a time.

So I think if you let your underwriter on the right deals based on their own profitability, you end up in one place. If you have a macro view, and you say this market based on the profitability and the sum of the part that makes the market, I would like to be at that level, being able to reconcile the 2 is, I think, something that has forced us to be a lot more aggressive when the market is favorable and maybe a lot more conservative when the market is not as favorable because I think we have this feedback loop where we try to match what people do every day where we want them to be, I think.

So you mentioned Bob Clements and Dinos and Paul. And obviously, you're running a company now and you have a Maamoun and David as your good tenets, I can think about 10 or 12 other people who I know who I think we're there at the company before the first day of premium even being written. And sometimes a certain group of people just come together in gel and make something magnificent happen. I think it's a wonderful thing, but there's also some concern that the -- like a fine wine that once it's over, it's over in some ways. And what's going on in the culture that says that even after those initial -- that initial founding momentum that really has delivered on this is gone, it's still -- the Arch culture is still intact. And how has been building it for a next generation of nonfounder leaders sort of transpired over time?

So we have 7,000 employees. So even today, I think I would say, half of our employees, more than half of our employees have probably joined Arch in the last 5 years. So just -- so I think my role, obviously my role as CEO, as a strategy and culture. And I think the culture, I think it's not my view linked to individuals. I think people like Paul Ingrey, Dinos, Bob Clements, Marc Grandisson, others, what they bring is interpretation of the strategy and they have impact on the culture. But the culture in itself exists. I mean the culture that we share is the culture of collaboration, business owners, where people have a lot of leeway to execute on their plan, the culture of urgency, culture of vigilance.

So all this, I think we -- we spend a lot of time teaching and not only me, but across the organization, the leaders of today, they teach and leave that culture every day. And I think we spent a decent amount of time reinforcing the culture and Paul Ingrey is no longer here, I think Bob Clements, Dinos has unfortunately passed away. So I think -- but the culture exists. And I think it's not in my view linked to any one individual. It's the Arch culture. That's how I see it.

One thing that you didn't include, which I think is an important part, is the comp structure. And so in these -- certainly, it makes sense at the early part of Arch establishing a long-term comp structure that everyone got tied up for a long period of time, that you would make the right decisions for shareholders over the long run. And there'll be no short-term type of decisions that had an adverse effect over the longer-term for the firm. And it had a few effects. One is that it's very hard to hire people away from Arch because they have a long tail in their compensation on the way coming to them. But two, it also creates a culture around long-term decision-making.

Now I looked at the 10-K from 2001, and I counted 76 employees. We're now at 7,600 employees. Does that long-term comp structure work in a small organization differently than it can work on a large organization?

I think I love our comp structure. The reason I still work for Arch is at times where reinsurance was doing well, not all part of reinsurance was doing well. Insurance may have done okay. I knew that I would get paid for what I do for the company, not an average across the company. So that still exists. I think today, I think the construction that you described probably applies to the key decision-maker in the company, people that control the significant business. I think the majority of our employees are on the discretionary plan. That fluctuates with the performance of the company, but not to the extent that the original comp structure with would. But I think it's because it's on every of our decision maker, and we have -- I don't know how many people on the 600...

About 10% of our employees are in that.

Yes. So 10%, those are the people that really make things happen at Arch. And they all have the same mindset that they're going to be paid for what they do. They pay for performance is key. And so I think it's still working and still a key fundamental difference maybe with people looking at what have you written this year, are you took advantage of that market, great job. I give you 1.5. In our culture, if you've done a great job, you're going to pay 2x. There's no 1.5 or if you've done a bad job, you're probably going to be a 0.5 or 0 as opposed to be to 0.8. So I think it's aligned really -- and I live that culture. I was a recipient of that culture, and I -- there were times where we thought of changing it and a lot of us fall against it. So I think it's still there today.

And just on this comp and culture things, so look, I've never underwritten anything in my entire life, those that can't do teach. And so when I think about like -- I mentioned, I would like to be a property cat underwriter for the last 2.5 years. That sounds like a really good job, and I really wouldn't want to be a property cat underwriter, from 2017 through 2022. If I could pick my timing, it would be really good and then other thing how does the comp structure work with something like that when a market is so hard that it's shooting fish in a barrel versus periods of time. I mean, Arch could pull back, but truth PMLs have not radically changed. I mean, we've gone from I think like you're at 7.5% right now, you're at the bottom, I think 3.9%, and that's twice as much, but back in '08, you were at 24%, it was a historic...

Two questions that you asked, Josh. You -- I mean comp structure, we can -- you can get -- short. I mean we have things are very cyclical...

I mean we have caps effectively, we manage. It's not all like -- I mean, yes, you eat what you kill but up to a point. There's carry forward mechanisms. There's ways to soften the compensation for our employees over time, let's be honest, when hurricane -- even in a really good market for property cat, if there's an active cat season -- you're going to lose money. But it's not -- hopefully not going to happen every year. So we can -- that's how we try to even things out over time with some mechanisms of carry forwards and...

Specific -- you don't get paid on 1-year result of cat because this rundown. You get paid over a 5- or 6- years period. So I think there is a smoothing mechanism. And I think the PML question that you -- so -- and ultimately, so I'll give you my example. I started on the property side. At the time, casualty was flavor of the day. I think it was not a flavor of the day. It was a decision that we made in terms of relative opportunities. There was after certain element, a definite opportunity on the property. But it came with a lot of volatility. At the time, the casualty market was in shamble. Price were multiplied by 2 or 3 times. We thought the casualty based on the pricing we are getting as a lot of safer for us to deploy capital, a lot of capital in that that's rolling the dice on the property. So we decided to go that way.

So I was on the property underwriting deal, but I felt a little -- my colleagues at the time on the casualty, the David of the world, the Maamoun and Mark at the time, they're having more fun than I have. I was having fun, but then the casualty market peaked and then Katrina happened, and then everybody had a $1 billion loss and Arch had a $200 million loss.

And so suddenly, we were in the property market, and we had a lot of fun for a number of years. So my view, but during all those years the unit got paid. There was some variation, but pretty much everybody get paid the same multiple because we are a team. So it's not like the property guys get paid when the wind doesn't blow and the casualty guys get paid. It's everybody is -- we are a team. So I think people see others doing the job. They are doing their part, which is to cut back. Some people are doing their part, which is to maximize the opportunity. But we all work as a team. So that's, I think, a little bit of the culture of the company. I think we don't win along. We win as part of the delivering to our shareholders the return that makes sense.

Well, you may have sort of said 2 questions. I'm trying to segue into a different sort of -- and I tell you, everybody wants to talk about the property cat market. I mean maybe it's -- Arch is a whole lot more the right property cat, but it seems to be what's on everybody's mind right now. I mean the amount of capital you're deploying in property cat, it's not crazy amount of capital. Pricing is really good. People came back from Monte Carlo, depending on what your -- you went in thinking. You came out thinking the same thing, but with stronger conviction on what you already thought. I don't think anyone changed their minds of anything. Where are we? What's happening? How good is the market compared to where it's been?

So I think even the market peaked 2 years ago and I think since that we probably lost maybe double-digit rates. I think it -- yes, the returns, I remember back at the end of 2022, when we really invested a lot of the capital in the cat business very few people did it. So price was skyrocketing. We've come back double-digit down from that point. I think the business, as far as we are -- we see is still very attractive. So we're trying to maintain what we have.

In terms of the PML, I mean, we talked about it earlier. I think Florida is a weird zone because there's not a lot of people -- a lot of purchase above the 100 years because companies don't have the money to buy as much as nationwide companies. So I think if you look at our PML, which is our peak zone in Florida, they're probably a bit deflated because there's -- if everybody would buy up to the 150 years, our PML may be double digit, maybe a bit higher. So I think it's also an imperfect view of how we see cat. I think we deployed more cat, which I think is better for us, more on a diversified basis across a number of zones. So I think our book is much bigger than -- it doubled compared to what it was before. So I think it's a much bigger book, but -- and we think it's still very attractive.

If pricing were down 10% at January 1, let's say, does that mean Arch would deploy less capital as a proportion of the balance sheet? Or it's still -- whether it's or -- we're not at the point where we have to make those decisions.

I think the latter because I think we have this concept of what we call an S curve, where you stay on as long as the thing is really attractive. When you start to be border line, that's when you cut back. So I think we -- I would expect us for us to be in.

Still very attractive. I mean it's a bottom line. I mean, we're only -- again, let's remember, 2023 might have been the best market ever. I mean, according depending on what we talk to, but some people best market in their career. So we're down from that, but we're not at a point and we're far from a point where we think we have to really cut back on our exposure.

The hurricane season is far from over, although some people are already declaring victory or some failure because some people want the wind to blow. You had a lot of different ideas going out there, what's -- but we did have a massive wildfire this year. That's strange one we expect. We haven't seen an earthquake in a very long time. We -- and there was a Tsunami warning just about a month ago. How is Arch thinking about those weird risks? Are you exposed to them in the same way that you are the things we hurricane risk? And is the industry correctly discounting the risk of things that have happened so rarely that they've forgotten they happen?

I mean in a way, it's difficult to price for what hasn't happened, but I think that's why we need a margin of safety. That's why when you look at the pricing of catastrophe or even the pricing of cat business, you can never -- it's true of every line of business. You never talk -- to actions and casualty, you need a margin offset. You never want to be in a line of business in a significant trade that is priced to perfection, what you know. There is always -- we don't know the cost of the good we manufacture. That's the insurance company. And in our business, there is volatility, there's a lot of unknowns. So I think you have to always factor in your pricing, some margin of safety to be able to support those. And you don't always get it right. But over time, I think if you apply the philosophy, I think across the line of business and across the book, I think you can sustain an event like California wildfire. It's much bigger than what people anticipated.

I think Arch has said various people, maybe in yourself sometimes that the hard market is an elevator and the soft market is an escalator. If you were listening to a lot of broker conference calls in 2Q, it felt like to them that the soft market was an elevator, and they would argue that E&S property pricing down 30%, 40%. It's staggering numbers. Arch does write excess and surplus property. The way you're talking about the cat markets, yes, it's going down, but it's going down in an orderly way just like you would expect. Is there something different happening in the primary markets on property that it's causing us to decouple from what you would otherwise expect on coastal property risks?

Yes. I think the way the market reacts is supply and demand. So I think what you've seen in the E&S property. And again, the thing that you hear is and -- there's always an account that's down 40%. But if you look at the majority of our accounts on the E&S property, I would say, we are down double digit. So I think we don't like to be down double digit. We like to be down single digits. But the truth is across our portfolio, the business we renewed and our premium is probably down a bit more than 10%. But -- so I think it's down, but I think sometimes you can't confuse the headlines, the one-off with what's happening on the various account.

What happened in the E&S property is exposed in after 3 or 4 years of catastrophe where people didn't make any money. So in was the loss that bought the bank of the account. So ultimately, people said, we can't write that business anymore, no support on the reinsurance on quota share. So when it forced people and especially MGS is to reduce the capacity they have to offer from a couple of MGS $200 million to $10 million. So that in itself creates an event where price more than doubled over a period of 18 months.

Unfortunately, 2023 passed, no significant losses, attachment points raise, deductible raise, no significant losses. A year after 2024, the fear of missing out came back. And I think it came back for the carrier ourselves by willing to expand a little bit the limit, but I think the guilty players were the MGAs, where they were able -- a lot of reinsurance capacity came and created allowed MGAs that were reduced to $10 million or $50 million capacity to go to $50 million.

And when that happened, in the $200 million program, where everybody thought the year before, you have $10 million, when the first guy comes in and take $50 million, everybody scrambled. So I think that's what you've seen. You've seen the rapid return of large limit into that market that created the dislocation that we are seeing today. So -- and I think it happened first in 2024. And I think it continued in 2025. I think those capacity continue to increase. So I think it put definitely pressure -- put a lot of pressure on the price.

But I would add to that, 100% agree with what Nicolas said. But the -- to your point about the elevator, right, I think that's somewhat of an isolated market. It's not -- I wouldn't want to generalize it for all lines of business, because we still believe strongly that when the market goes softer, it's more in the escalator way. It takes time. It's not overnight. There's people ship away at it here and there and 5% reduction here, another 5% the next year. This example on E&S property to me is -- and again, we talked about the hairy coastal cat-exposed business is a little bit of, again, a unique kind of animal given the dynamics of the MGAs and capacity and you need big limits, et cetera. So that's, again, just a -- I mean just a nuance here on what it is.

It's a good point that Francois is making because it's one of the maybe very few lines of business where MGAs have dominant -- have been dominant in the past. I think we've seen carriers outsourcing their cat underwriting to those MGAs. I think it's -- it's a corner of the market where MGAs have clearly an important -- had played an important role. I don't think it's true maybe cyber, there's the other one, but less so, I think. So that's what the dynamic is that way.

So in your management comments, you spoke about adding mortgage in 2014, 2015, and then big way in '16 of course. You can look at Radian or Magic or -- the investors still don't like that business. What do you think that the markets are getting wrong about that business? And you want to talk about Arch's business necessarily, but do you think that the markets are wrong and how they're treating your competitors? I mean in terms of their thoughts on valuation and whatnot?

Well, I mean I don't think people don't like it. I think that was, call it, 5 years ago. I think people have gotten a lot more comfortable with what we do, what our competitors do. I think the challenge for the monolines is again, what else can you do, right? You're somewhat limited in being a monoline homogeneous product in one country. And so what's the growth potential? And we -- no question that the industry has remained extremely disciplined, which is a great thing for all of us, but beyond how do you return capital, dividends, share buybacks, et cetera, at the end of the day, it's still a small market, right? You got 6 players in it, more maybe the exception being part of a multiline group where we think that is a tremendous way for us to flex in and out with our capital deployment and capital allocation.

But I think the challenge still remains for monoline companies is what else can we do? And I think to me, that would be the main reason why investors may just don't value the asset maybe as properly, I'd say there's a discount just based on kind of prospects for either growth or new opportunities to integrate.

It's a small market. It's very -- I mean it's very technical in my view. It's very complicated. So it really didn't perform well in the financial crisis. So people remember that most of those companies could have gone out of business. So I think the -- and I think it's -- yes, it's hard to invest in my view, to invest the time to really understand the -- you guys did a lot of teaching to understand the fundamental of the business. So that's also an area that as far as we see is pretty flat these days in terms of premium growth. So...

In doing the teaching, you kind of let the cat out of the bag in some ways. So I mean on -- I think the UGC also just -- or some of the credit was actually good business that you bought and you guys have some ideas. So one of the major innovations, of course, is going away from FICO score based rate card scoring for pricing and come to multivariate pricing models that ask things that weren't asked before. You decided to offload the tail risk to the bond market in a great way, and you taught everyone how to do it, and now you look at your competitors, and they're also doing those things. The Arch's way was the right way.

But in being imitated, I realize that you have the advantage of being multiline, and so you -- not everything is a nail for you when there's -- but have your competitors caught up to you? Is there -- is there an Arch advantage in how they're approaching the business that you haven't given away the secret?

Well, I see it as a little bit like progressive, right? I think we were at the forefront of it. So I would like to think that we still like it. We still have an advantage but the gap has narrowed for sure. I think where we still have an advantage that remain -- I mean, we hold on to is that we're not only in the U.S., right? We're international. We do the CRT program, we're in Australia, we're in Europe. So I think our mortgage segment is much broader than just private MI in the U.S., and that remains a competitive advantage because, again, given the state of the U.S. housing market, it is what it is for all 6 of us, but we can play and we can fish from different ponds and play the game a bit differently.

And I think the team -- our teams have done a remarkable job playing the diversification card. We are in the U.S., our book in the U.S. has shrunk, but we -- the difference has been known and made off by some of the writings in Australia and in Europe and the CRT. So I think we're overall flat where otherwise if we were only in the U.S., our top line would be down. So I think it's...

And I think the takeaway from the UGC acquisition, you bought a good business at a great price in a buyer's market. And it's paid a lot of dividends. You haven't done much M&A. But you did buy MidCorp from Allianz. And I think there's some -- there's still some misunderstanding about exactly where that fits in. Arch was -- is a business that has licenses to write insurance, both on admitted and non-admitted basis. What did the acquisition in MidCorp give Arch that Arch couldn't have built on its own?

Yes. So I think if you -- on the insurance side, the way Arch position historically was more on the large accounts. So we had large accounts and we had a few specialty few program division, but the core of the business that we wrote was -- we need liability, I think professional casualty large accounts. So we wrote D&O, large accounts, we were general liability account, construction and large accounts. So a bunch of large accounts and a bit of -- some smaller business, but we never really had a mid-market offering. And I think the way we got set up, it was to face the larger broker, the Marsh and Willis. So we had experts in D&O facing broker export in D&O had expert in GL facing, in workers' comp facing expert brokers and GL workers' comp.

So the mid-market business, it's more of a package component to it. So I think you'll be able to -- and we didn't have that. So we've been in the last probably 5 years, we had decided to go down from the large account to the upper middle market. And we have made enrolled in that market. I think we've done well on the -- on the construction side, we got a decent offering on the middle market construction basis.

But on the property led middle market, I think Arch historically has never been outside of the E&S side of the business, which is cat-exposed, a property franchise. So I think -- and we had tried to create one, but it was really not working. So I think we've -- what we bought with MidCorp is really a property-led mid-market offering. So think of manufacturing, hospital -- hospitality.

So I think -- and to be able to do this, I think you need large capacity on the property side, which we didn't have, which came along with the portfolio indeed, risk management that we really didn't have on the property side. You need -- we have an HPR group that underwrites highly protected risk. So -- and we got a network of agencies that we do business with that is actually difficult -- you say second-tier, but second level of -- not the big guy, the second-tier level, that takes years to form..

So I think we really got a franchise that's really complementary to what we wanted to achieve. So I think that's -- we also bought like reinsurance program that support those $500 million to $1 billion limit that we put on certain risks. So I think it's a real franchise that we bought that's really complementary to -- and will allow really fast forwarders probably 10 years in what we could have been organically, and that's what we like about it.

So in 2020, you bought a plurality stake in Coface. And I think that it's kind of like mortgage oligopoly business. And you said we would love to be like part of -- we don't have a lot of competition. It was -- has a taint on it that people don't like this business. It's a credit business and people didn't like it. And our said we're smart. We're going to make this business better. And I think actually, of those 3 things, the big surprise was that Arch actually, these Coface guys actually knew what they were doing. No, no. We like other operating it and -- it was a business that you didn't need to fix. And maybe UGC, of course, come out of credit cards, but they also turned out to be much better than everybody else. Is MidCorp a business that needs to be fixed? Or does it come with the capability to solve its own problems?

So I think -- I mean, I think that a lot of the remediation on the part of the business that we like, which is the middle market, package business, property led is they are in a good state. I think can we -- can we help them with their risk appetite, cross-selling more workers count? Can we have them cost saving maybe some private D&O, some employment liability we can. And I think where we can help them is in the data analytics and helping them target better customers, having a better value proposition that resonates with clients. So -- but the fundamental of the business for like 3/4 of the book, I would exclude the program business, which I think we don't like as much.

But we -- I think it is there. I think a lot of the work has been done. I think -- there's more we can do, my view, to make the brand more formidable and to make the value proposition resonate further and on a broader basis with the agent network. But I think it's -- my view today is that we bought something that has real value.

In the press release on MidCorp, I think around mid-core and entertainment business, property it's interesting. And of course, one of your competitors had a very large sports entertainment book that they put into runoff after a massive reserve charge they took in the fourth quarter of last year. Is Arch's timing -- is this similar sort of businesses? Arch's timing somehow have lucked out that there's a major competitor who's been taken out of the market at the very time that you've acquired the...

This is a very different business. The entertainment business, again, to us, it came with the acquisition, but it truly is to us a specialty line, very much like the one -- the other specialty lines like to do. Entertainment for us, in this case, is purely, call it, Hollywood. It's live entertainment, it's production, it's TV shows, it's movies. So it has nothing to do with sports or entertainment in that way. It's truly kind of when you turn on your Netflix favorite shows, insurance, again, to make that happen is what it's all about. A lot of it's through a large MGA that has like relevant expertise in that space, and that's how the business comes to us. But that's -- so it's a little bit of a different animal compared to what you might have...

Are you not the underwriter in that business? Are you the capital provider and it's coming through an MGA?

Well, MGA does the underwriting according to the guidelines just like any...

And I think we have -- it's sort of a partnership. I mean some of the underwriting is our tools, but we also have direct connection with all the major studios because the limit that they buy are big. So I think we actually meet with all the clients. So it's a little bit of a -- we're tied to the hip with the MGA. They do certain things. We do a lot of the risk management. We do some of it we do ourselves. So I think it's -- so it's more of a partnership with MGA than it is a true MGA relationship where we outsource all the underwriting to the -- and I think the thing that was attractive to us in that line of business is that post-COVID, studios stopped being able to work. So there was a lot of losses in that business. I think the pricing coming off COVID was very strong. So I think we -- it was -- the timing of getting on that book was very, very good for us.

So one last question, different track. We follow operating earnings for ex gains and losses. But almost consistently income is higher than its operating income, which is different from almost every other company. A lot of companies put mark-to-market gains on illiquid investments into their operating numbers and Arch does not.

A couple of years ago, Arch said, we could be doing more with our investment portfolio than we've done in the past. Given Arch's sort of quiet success in investing that you haven't really touted, is that even going to widen further as time goes on as you take more opportunity to use that book? Is that differential widen in the future compared to what...

It might. I mean just for everybody's benefit, yes, we do not include income from alternative or private investments in our operating earnings. It's still a very good source of book value per share growth, which is ultimately maybe the most important metric to us, and no question that given the environment we have and our size, we have increased our allocation to alternative investments. So could the gap wind even more? It might, but we think there's value for us to be consistent in how we report the numbers. We're very transparent about where everything goes. We're not changing our tune every so often. We've been consistent in that way. And -- and ultimately, if it shows up in book value per share growth, I think people will see that. So I think that's a good place for us to be.

Wonderful. Well, thank you for your time. Thanks for being here, and thank you for the audience and anyone listening online.

Awesome. Thank you.

Thank you.

Good day, ladies and gentlemen, and welcome to the Second Quarter 202 Arch Capital Earnings Conference Call.

[Operator Instructions]

As a reminder, this conference call is being recorded. Before the company gets started with its update, management wants to first remind everyone that certain statements in yesterday's press release and discussed on this call may constitute forward-looking statements under the federal securities laws. These statements are based upon management's current assessments and assumptions and are subject to a number of risks and uncertainties.

Consequently, actual results may differ materially from those expressed or implied. For more information on the risks and other factors that may affect future performance, investors should review periodic reports that are filed by the company with the SEC from time to time, including our annual report on Form 10-K for the 2024 fiscal year.

Additionally, certain statements contained in the call that are not based on historical facts are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. The company intends the forward-looking statements in the call to be subject to the safe harbor created thereby.

Management also will make reference to certain non-GAAP measures of financial performance. The reconciliations to GAAP for each non-GAAP financial measure can be found in the company's current report on Form 8-K furnished to the SEC yesterday, which contains the company's earnings press release and is available on the company's website at www.archgroup.com and on the SEC's website at www.sec.gov. I would now like to introduce your host for today's conference call, Mr. Nicolas Papadopoulo and Mr. Francois Morin.

Good morning, and welcome to Arch's second quarter earnings call. We are pleased to report another solid quarter with after-tax operating income of $979 million, resulting in an operating earnings per share of $2.58. On a year-to-date basis, we have grown book value per share by 11.4%, a strong outcome that reflects our focus on execution and long-term value creation for our shareholders.

We achieved this result by staying true to our core principle of cycle management, where we actively grow our writings in lines of business that offer attractive returns while selectively reducing exposure in areas where risk-adjusted returns fall short of our targets. This disciplined underwriting approach paired with proactive capital management positions us to consistently generate superior returns across market cycles.

P&C market conditions were largely consistent with the first quarter. Some sectors are seeing increased price competition, while others continue to achieve rate improvements. In the current environment, much of our growth is because of the strength of our relationship with distribution partners and insurers. This not only reflects Arch's increased scale, but also the increased relevance of our platform, one built on a broad and flexible set of capabilities.

Our underwriting expertise, supported by our advanced data and analytics capabilities enables us to deliver valuable insight and innovative solutions that help our customers achieve their ambitions. Ultimately, the strength of our relationships, our commitment to consistently deliver meaningful customer value and our ability to respond quickly to changing market conditions are significant differentiators in today's environment. As we've discussed on previous calls, there isn't one underwriting cycle, but many.

This principle was reinforced last month where Paul Ingrey, Arch's former Chairman and one of its founder, spoke to a gathering of our top leaders. It was a unique opportunity for our newer team members to hear directly from someone whose vision continue to influence our culture and operations. In addition to sharing stories from Arch's early days, Paul reminded us of the enduring value of a diversified platform, a core part of Arch's original vision. He explained that the insurance market is comprised of 1,000 points of light, each representing a potential opportunity. While the intensity and location of some of those light may have shifted in today's underwriting environment, many continue to shine. Our role, as always, is to find those with the greatest potential.

Our message is this. The P&C industry still presents meaningful opportunities for disciplined underwriters to generate attractive risk-adjusted return on capital. Now I will briefly walk through segment performance, starting with our Property and Casualty Insurance group. Underwriting income for the quarter was $129 million and net premium written surpassed $2 billion, up 30.7% from the second quarter of 2024. This growth was largely driven by our acquisition of the U.S. middle market and entertainment businesses, which contributed $451 million in net premium written.

Organic growth outside the acquisition was modest. We remain focused on integrating the new unit with client retention and portfolio optimization progressing in line with expectation. Growing our presence in the small and midsized market is central to our strategy. Elsewhere in North America, rate increases broadly offset loss trends. We saw selective growth in casualty lines, particularly in alternative market, E&S casualty and large account casualty, where pricing continued to outpace loss trends.

However, competitive pressure persists in E&S property, excess D&O and cyber. While pricing in excess D&O and cyber appears to be stabilizing, we are maintaining a cautious stance and prioritizing margin over volume in these lines. Internationally, our Lloyd's and London market business are experiencing increased but rational competition.

Our long-term investment in establishing a leadership position at Lloyd's continued to yield strong results, reflected in favorable signing and our ability to attract top-tier underwriting talent. The Reinsurance segment delivered strong second quarter results, generating $451 million in underwriting income and over $2 billion in net premium written. The underlying business is attractive with gross written premium increasing 8.7% compared to the second quarter of 2024.

We grew our casualty reinsurance premium year-over-year, supported by selective new business and rate improvements. We also expanded our property catastrophe writings, particularly in Florida, where we identified attractive risk-adjusted returns and responded to increased clients demand for additional limits.

Specialty lines remained a strategic focus and our teams found several new opportunities this quarter. That said, our property portfolio other than cat excess of loss contracted. As cedents retain more risk and margin on certain portion of the portfolio fell below our target. We are actively managing our exposure in these areas to maintain underwriting discipline and long-term profitability.

We were generally pleased with the state of the midyear catastrophe excess of loss renewals. Pricing was slightly down, but terms and conditions were stable with primary insurer maintaining high retentions. Overall, catastrophe excess of loss margin remained attractive. The broader reinsurance market continued to exhibit discipline. We are growing selectively, focusing on areas where margins are attractive. We are committed to pursuing the brightest opportunities, those offering the strongest risk-adjusted return.

Our Mortgage segment delivered $238 million of underwriting income in the second quarter. Mortgage originations remained relatively low, reflecting the impact of higher mortgage rates and affordability. Still, the strength of our global in-force portfolio and high persistency allows the mortgage group to provide steady profitability and valuable earnings diversification even with lower volumes of new insurance written in recent years.

Despite ongoing economic uncertainty and low origination activity, we remain confident in the quality and durability of our in-force portfolio, which is the core driver of our mortgage earnings. Investable assets grew 4.4% in the second quarter, benefiting from our strong premium growth and cash flow. Net investment income rose 7% from the first quarter to $405 million with overall yields remaining elevated.

Arch's ability to dynamically adapt to multiple underwriting cycle continues to set us apart. This is a function of both our founding principle and a culture that prioritizes and rewards underwriting profit over premium volume. Even in a competitive environment, our global diversified platform offer many points of light for our underwriting teams to pursue.

For a company with a strong underwriting culture like Arch, this remains a market where we can deliver differentiated performance and maximize long-term shareholder return. I will now turn the call over to Francois, who will provide more details on the financial results before we open the line for your questions.

Thank you, Nicholas, and good morning to all. Last night, we reported our second quarter results with after-tax operating income of $2.58 per share, resulting in an annualized operating return on average common equity of 18.2%. These operating earnings, combined with a high level of realized gains, solid contributions from our equity method investments and a noticeable appreciation in our fixed maturities investment portfolio resulted in our book value per share growing by 7.3% in the quarter.

Similar to last quarter, our 3 business segments delivered excellent underlying results with an overall ex-cat accident year combined ratio of 80.9%, down 10 basis points from last quarter. Our underwriting income included $139 million of favorable prior year development on a pretax basis in the second quarter or 3.2 points on the overall combined ratio. We recognized favorable development across all 3 of our segments and in many of our lines of business. The most significant improvements were, once again, most seen in short tail lines in our Reinsurance segment and in mortgage due to strong cure activity.

Current year catastrophe losses at $154 million, net of reinsurance and reinstatement premiums were slightly below last year's level for the same quarter and were primarily the result of severe convective storms in the U.S. This is the fourth and last quarter where we are separately reporting the contribution of the MidCorp and entertainment unit to the insurance segment financial results.

For the quarter, net premiums written for the acquired businesses were $451 million, contributing 28.9 points to the reported year-over-year premium growth for the segment and generally consistent with last quarter.

The strong premium volume this quarter reflects the seasonality of the business with the second quarter generally having the most significant renewal activity. We are now on track to write slightly more than $1.5 billion of annualized premium for the first year of owning this business, which is slightly higher than the forecast at the time of the acquisition.

The inclusion of the acquired business in the segment's results increased the current accident year ex-cat combined ratio by 40 basis points. This can be further broken down to include the other operating expense ratio that was lowered by 40 basis points, the current year acquisition expense ratio that was lowered by 20 basis points due to the write-off of deferred acquisition costs for the acquired business at closing under purchase GAAP. As expected, this benefit has become less significant as policies written before the acquisition date have rolled off and the accident year ex-cat loss ratio that was 100 basis points higher, reflecting the underlying results of the acquired business.

The Reinsurance segment produced its best quarter ever in terms of pretax underwriting income, reflecting the underlying profitability of the business written over the last few quarters and the absence of significant catastrophe activity. Of note, the 5.8% growth in net premium written in the quarter was muted due to the timing of certain ceded premium accruals. The effect of this change in timing was to reduce our net premiums written in the property catastrophe line of business by approximately $94 million this quarter. We expect to record an equivalent offsetting benefit in net premiums written next quarter.

Overall, this item should not have a significant impact on net premiums earned. Once again, our Mortgage segment delivered another very strong quarter with underwriting income of $238 million. We note that these results reflect the completion of tender offers for 2 Bellemeade Re securities at a onetime cost of $15 million. We expect that this expense will be recouped through lower levels of ceded premium over time, mostly through the end of 2027 and will ultimately result in a net economic benefit to us. The delinquency rate for our U.S. MI business increased slightly to a very low 1.93% as new notices of default were more than offset by strong cure activity.

On the investment front, we earned a combined $567 million from net investment income and income from funds accounted using the equity method for $1.50 per share pretax. Net investment income in the next few quarters should grow in line with the size of our investment portfolio as our portfolio book yield and new money yield have converged in the last few quarters. Income from operating affiliates was comparable to the amount in the same quarter last year with contributions from both Coface and Somers Re. Cash flow from operations remained strong at approximately $1.1 billion for the quarter.

As of January 1, our peak zone natural cat PML on a single event, 1 in 250-year return level on a net basis increased slightly to $1.9 billion and now stands at 8.6% of tangible shareholders' equity. Our PML remains well below our internal limits. On the capital management front, we repurchased $161 million of our shares in the month of July, in addition to the $360 million worth of common shares repurchased this year through the end of the second quarter.

In closing, our strong balance sheet affirmed by our recent credit ratings upgrade and our diversified platform position us well to deliver superior results in the periods ahead. With these introductory comments, we are now prepared to take your questions. Jenny?

[Operator Instructions] Our first question comes from Elyse Greenspan from Wells Fargo.

My first question is just on the insurance segment. If we back out MCE, right, growth was around 2% in the quarter. It feels like based on commentary, the market was stable. So maybe that's about where you guys are running in the short term. But I know, obviously, there's a lot of business lines that triangulate into that number. So just hoping to get kind of a forward view just on premium growth within the insurance segment unlike the exMCE piece.

Yes, it is. Yes, I think so the story here is that, again, we -- as I described in my opening remarks, we're pivoting where the opportunities are and kind of adding out where we think the business is less attractive. So this quarter, I think we like the casualty line. So I think we grew in the casualty lines. And I think we grew on the international business.

And we have a big book of professional lines. So as those market conditions were more competitive and more difficult to trade, that had a negative headwind on the premium for the quarter. But the good news there is that it looks like the rate decreases on both excess D&O and cyber are leveling off. So I think as we look to the future, I think I don't have a crystal ball, but we think the favorable wind on the casualty should support additional growth, and that's what I can say.

And then my second question was just on capital. It sounds like, right, Francois, capital return, share repurchase picked up in July. Just kind of looking for current thoughts just around excess capital levels and just willingness, I guess, to lean in to buyback as we go through the third quarter and get into the peak of wind season.

Sure. Yes. I mean, as you've seen terrific results in the second quarter. So our capital position remains very strong. I think no question that we're still working hard trying to deploy that capital in the business. That's always our top priority. We still think there's opportunities to do that, but maybe not to the full extent of which the capital generation we've been able to achieve. So no question that capital return is a focus area for us.

Something we -- no different now than it's ever been. We look at it on a regular basis with management and the Board for sure. And no question that capital return in the second half of the year, I mean, we think we will be there, not knowing again what opportunities might be in front of us, but we look at both share buybacks and potentially dividend if we need to. Those will be very much part of that. And historically, we've kind of slowed down a little bit during the wind season. I don't think we necessarily -- we're a different company, I'd say, right now. So we're going to keep looking at the opportunity in front of us. But certainly, at current price levels, we find the stock to be attractive and we'll be more than happy to buy back as we move forward.

And then just my last one. Was there any adverse development in the quarter from the U.K., Russia aviation ruling? And if it was even small, if you could just let us know the number?

Well, we don't -- I mean, no question that we had some adverse in the sense that, yes, we increased our IBNR for both on the insurance and the reinsurance side. The reality is these -- again, we're not big players in that space, but the claims have evolved, and that was basically absorbed within our IBNR through short-tail lines. So what you're seeing and what we'll disclose more of in our 10-Q is no adverse in total. We still have favorable in total. But yes, we reflected some changes, some new developments in the Ukraine-Russia conflict.

And your next question is from Michael Zaremski BMO.

On the prepared remarks, you made comments about expanding the prop cat writings, I believe in Florida, particularly. Just maybe just macro levels, I feel like you all have been excellent underwriters and continue to be in prop cat, especially. Would you say that expected ROEs are -- I don't know if you're willing to kind of put a corridor around them in the 20s, down from the 30s?

Or just -- I guess we get asked a lot about can prop cat reinsurance pricing continue to decline off excellent levels? I feel like the consensus is yes. But just curious, given the rate of decrease over the past year, how do ROEs kind of look in terms of risk reward?

Yes. Our belief is that ROEs are still very attractive. And just to qualify, I think the price decrease, my view is not always across the board. I think, for instance, in Florida, what we've seen is most of the competition is really on the high end of layer. And at this renewal, I think the FHCF move up their attachment points. So there was a need for capacity below the FHCF and the size of the FHCF.

So I think we actually were able to write more below, above and by the side because we are able to write across the board. So I think -- and below the FHCF, I think the price decrease were they're pretty flat, I think. So I think it's -- I think we -- if you look at where we come from probably a year ago, probably the price where we had gone to 100% rate increases. I think we've seen some rate decrease, but the business remains really attractive as -- as we see it.

Okay. Got it. That's helpful. Maybe pivoting to the strategy about growing your presence in the SME marketplace. I know you've been doing that strategically, inorganically and organically. But just curious, maybe you'd be willing to elaborate, is there kind of a specific pocket that's really high up on the wish list like U.S. retail, traditional main market? Or is it kind of a broad appetite to just go continue going kind of down market more broadly?

I think for us, I think we really start in the mid-market that you've seen with the acquisition we've made of the Allianz portfolio that's our sweet spot. We come from the larger accounts. So I think we had strategic aspiration to grow in the upper middle market. And I think that's why the acquisition fits strategically well. And I think the strategy thesis behind it. I think it's even more compelling today than it was when we did the deal.

Yes. And I'd add to that, that while -- I mean, truly small business is not an immediate action item. I mean, down the road, who knows where things go, but it's a different animal. I think the technology, the system, the distribution. So let us focus on the middle market acquisition.

There's a lot we need to do with it, a lot we want to do with it. where things are going well, but I mean, it's still early days. So I think there's a lot we can -- a lot of value we can generate from that asset, and that will be the focus for the short term.

Okay. And maybe I'll sneak one last one in. Maybe just -- I'm going to stick, I guess, high level, mortgage insurance continues just to be a gift that keeps giving. There's -- we're seeing some data points on your data, too, but maybe less so, but delinquency rates going a bit higher, but we're still seeing good -- still some levels of HPA. I guess just more broadly, has anything changed over the last couple of quarters in terms of the mortgage outlook other than I think we clearly know the top line in the U.S. is going to continue to be negative. But any macro data points that are kind of changing Arch's kind of viewpoint on a medium-term basis?

I wouldn't say anything has changed our viewpoint. Certainly, the housing market data has itself evolved a little bit, which is maybe in line with how we thought about home prices moving forward. For example, we have shied away or we've been, I think, underweight in certain geographical areas that seem to be currently under pressure in terms of home prices maybe even coming down in some of those places.

So that's been part of our, I'd say, approach is to manage our production or manage our new insurance written strategically with having a focus on where we thought home prices would be more sustainable and less risky, I'd say. So that's maybe one data point. Again, I mean, what's happening, what seems to happen and the data seems to be in line with how we approach the business going in.

But bottom line is, yes, we -- our portfolio has been constructed to be a little bit kind of -- again, staying away from the high-risk areas, high risk, not only geographical areas, but types of loans, so high LTV, high DTI. So that's been kind of a little bit how we constructed the portfolio. And so far, that seems to be paying off well for us.

Your next question is from Cave Montazeri from Deutsche Bank.

My first question is on the Florida market. Can you give us a bit more color? Is it mainly like the tort reform from 2 years ago that are feeding through that's making the market a bit more attractive now? Can you like maybe break down a bit more what's making Florida a lot more attractive now?

So I think the tort reform had an impact, I think, on the signed benefits. So we've seen the local companies attritional loss ratio dropping from the 50s plus to now in the 20s. So the nice thing for us, I think we mostly write excess of loss in Florida. The nice thing for us is that it affords them the money to buy the reinsurance they need to protect the capital investors have put in those companies.

So -- and pay a price that if you buy a limited amount of capacity, you pay one price. But as they're looking to buy closer to the 100 or 200 return, they have to spend more money. So I think that is what has made the -- and the storm, it is a number of storms that have hit Florida have made the market attractive on an excess of loss basis.

Helpful. And my follow-up, sticking with reinsurance. The 5.8% growth you said had a bit of negative impact from a timing point of view of some business that you said it was $94 million negative impact. So does that mean that your premium growth in reinsurance in the quarter would have been double digit this quarter, adjusting for that? And if so, what are the pockets of growth that you were able to just lean on for reinsurance? I mean, Florida is one of them. Was there anything else that you want to flag?

No, I mean yes, you're right. I mean, again, it's a timing issue. So it's really something that typically would happen in Q3, it happened in Q2 in terms of ceded premium. If you adjust for the $94 million is correct, the net written premium growth for the segment would have been double digits. slightly higher than the gross written premium growth of 8% or so, right? So in line, and we bought a little bit less reinsurance in some pockets.

So I mean, that's part of the strategy along the way. So I think those 2 numbers in terms of written premium are aligned. And if you convert more specifically the growth to property cat, you see property cat premium growth, call it, higher than the segment, right? So 20% range. And that was really the story I'd say this quarter. I think we saw some attractive opportunities in property cat. And the rest, as you know, there's offsetting in other property and other specialty, but a good part of the story would have been in prop cat.

There was -- in fact, there was more demand in the marketplace. So I think we were able to secure what we thought was attractive pricing. So it's not only gaining market share. It's mostly being able to go along with the need or support the needs of our major clients as they buy more limits. So that's really a big reason for the growth.

And your next question is from Andrew Kligerman from TD Cowen.

So in reinsurance, you mentioned that you're growing in casualty. And I'm kind of curious, on a lot of the calls that we've heard so far, casualty rates in general, I'll and point them at around 10%. But I'm hearing reinsurance pricing in the casualty area has come down a bit. So I'm wondering if you could give a little more color on what you're seeing on the primary level in various casualty lines and what's happening in reinsurance, particularly for Arch?

Yes. So the story -- the casualty business, I think it's mostly quota share. So I think the story on the primary side and the reinsurance side as far as the underlying business is very similar. And there, I think we've seen rates, as you said, probably exceeding trends. So I think it makes it -- and we are selectively growing both on the insurance and trying to grow on the reinsurance.

I think where you see the difference in market behavior, I think there is a lot of supply on the reinsurance side. And it's difficult for many of the market to expand their writings because there's a lot of the competition is also looking to expand. So that translates in terms and conditions and ceding commissions not changing because if you look at the experience of those portfolios and based on the prior year development, you would want probably some of those treaties to have lower ceding commissions.

I see. And then just shifting over to MidCorp. Could you give an update on where you are in the process of incorporating data and analytics? Is the performance -- the underwriting performance where you've -- is it where you expected it? And when do you think MidCorp could kind of pivot to growth?

Yes. So I would say that it's a process. It's a long process. So the integration is actually pretty much on track. I think the -- we've almost entirely rolled over the book over to Arch. And so that's almost done. I think I want to remind you that we're still a year away from the full separation with Allianz. So that's hanging there. But we feel good about the rollover of the book. We feel good about the team and the underlying business that we've acquired. I mean -- and again, as I said earlier, the strategic thesis, I think, is even more compelling in our views.

And I add to that the middle market book as part of the overall acquisition, I think, has -- the pricing environment is good, is attractive. So that's, I'd say, exciting for us. I think that's an opportunity for us as we move forward in a -- gives us another opportunity set to get into and kind of pursue aggressively. So I'd say we're excited about that. I mean the platform is there. The distribution is there and the team and then the rate environment, we think, will support it. So that's a positive sign.

And your next question is from Josh Shanker from Bank of America.

So looking at your commentary about Florida and the general traction of the property cat market, you can't help, but look at the underwriting and see how they've declined. There were some one-off transactions in 2Q '24. Can you square how much of the business a year ago was just a few unique things that really boosted the numbers and what a normalized year-over-year growth rate might be for the property cat line and the property other line reinsurance?

Yes. I think your question is other property? I just want to make sure I answer that.

I look at both. I mean the premium volumes are down fairly dramatically from where they were a year ago, but you're leaning in and you like the line, there's a disconnect there. So I'm trying to bridge that.

On the cat side, I think I'll let Francois explain because I think we talked about it earlier, so we can go over there. On the other property, I think the comment I would like to make is that it's really -- you guys have to understand it's really a mixed bag of line of business, a bit of homeowner, a bit of commercial, it's geographically diverse, U.S., Canada, international, you have fact and treaty.

So I think the reduction in other property this quarter is really driven by, as I said in my prepared remarks, I mean some cedents deciding not to buy some revision in certain of the subsegment of the book based on the companies not meeting their targets because, for instance, in E&S, we've seen some drastic reduction and also a couple of decisions that our team made and one of them is a big deal, not to renew a contract.

So I think overall, I think the business remains very attractive, but it has to be managed. So I think this -- and I would contrast the experience of the other property with a similar experience we have in specialty, where there -- it's also a mixed bag of lines of business. And there, I think headwinds have been cyber, but this quarter, on the international side, we were able to land a few large transactions.

And so we are up significantly there. So I think you have to -- in reinsurance, as we deploy, we do large deals, I think you have to be able to accept the volatility quarter-over-quarter some of it is going up, you love it when it goes up, but sometimes it goes the other way. I think that's what happened in other property this quarter.

Yes. And just to finish up again on property cat, I mean, Josh, once you adjust for this timing issue on the retro, prop cat, again, up, call it, 20% year-over-year in the quarter. So that's -- I think that's a reflection. Big picture, again, we like both prop cat and property other than property cat, still very attractive business.

But to Nicolas' point, specifically, there's -- the reality, there are some transactions that don't always kind of come back or change in their form or their substance and the seeds by us, et cetera. So that's been -- that's truly what happened this quarter. And unfortunately, I can't help you on how the third and fourth quarters are going to look like, but we think there's -- it's still a very attractive market.

And just in terms of the impact on acquisition cost ratios, did that cause a onetime unusual item that we should feature and think about going forward for normalization?

Not in a big way. Acquisition for reinsurance, where you see the variability sometimes is more on the profit commission. So I mean, the underlying performance of the book will end up having maybe a more -- a bigger impact. So the fact that these nonrenewal and/or growth, I think, generally speaking, should not have in and of itself a significant impact.

And your next question is from David Motemaden from Evercore ISI.

On -- sticking with the Reinsurance segment, the press release had called out some attritional losses, higher attritional losses within the underlying loss ratio there. I'm wondering if you could just elaborate on the nature of those, what lines? Or was it just kind of things swing one way or the other in any given quarter, just sort of normal volatility?

Yes. I mean there's no question that when we compare year-over-year, last year was maybe one of our best quarters ever. There's literally not much that went on in the, call it, large attritional space. This quarter, we had, I mean, a little bit of a hit with the Air India crash. We had a couple of refineries that exploded. I mean those make the news, and we don't -- we're not here to -- we're not going to get into all the details of each one of them, but that explains a little bit the volatility. I mean that's the business we're in, right?

So I think the takeaway is that there's nothing alarming. It's part of the normal volatility in the book. Again, we go back to our preferred way of looking at it on a trailing 12-month basis to -- I mean, at least temper some of these kind of shocks or kind of events that may or may not happen in a given quarter, but that's really the story. So a couple of large claims that just happened to take place this quarter, and we didn't have those a year ago.

Got it. Makes sense. And then just also just sticking with the reinsurance business. So I think you called out specialty lines there remaining a strategic focus and that there were some new opportunities that were bound in this quarter. Wondering if your outlook has changed at all in terms of the growth outlook there, how the pipeline is looking and if you see this sort of growth being sustained?

So on specialty, I think the headwinds have been really cyber. We had a decent sized book of cyber. So that has been under pricing pressure. So I think that probably -- as we not allocated as much capital to the line than we did probably a year ago. But I think again, it's a mixed bag of lines of business. And a lot of those lines of business, we would like to grow.

So the question is our teams doing the work they need to do to generate those opportunities. So we landed a couple this quarter. I think we want to do more. I mean, but in a competitive market, it's sometimes hard to find new opportunities. New business is hard. So I think I'm positive on the outlook, but whether we find those opportunities or not, I can't tell.

And your next question is from Alex Scott from Barclays.

I wanted to ask about the Insurance segment. And I guess I just wanted to see if you could provide an update on sort of how far you are through some of the MidCorp remediation and just maybe high-level comments on how we should think about some of the benefits from that, which would help margins and any potential offsets from just thinking through like pricing versus loss cost trend spread and whether there's deterioration.

I think we're going -- as I explained earlier, we're going through the integration. I think we feel good about where we are today. I think the only area, I think, that I would highlight in terms of performance is probably on the program side. I think we've taken some action -- underwriting action on the program side that should lead to some performance improvement spread over the next 12 to 18 months.

So that's the only thing that I think you'll be able to see. But we're doing a lot of work, but that work will be -- it will take time. But the action on the program over the next 12, 18 months, you'll be able to see some of the impacts of that.

Yes, on the loss ratio. On the expense ratio, I'd say the operating expense benefit that we're getting in terms of scale, I think, are sustainable, right? So there is no question that adding, call it, $1.5 billion of premium to the insurance segment with not necessarily a corresponding amount of operating expense in terms of IT and management, et cetera. So that's a benefit that we think is here to stay.

That all makes sense. Follow-up I have on insurance. Are you seeing any changes in just the dynamics with admitted versus E&S in terms of volume? I mean, if I kind of go back to the, I guess, part of the rationale to buy MidCorp, you guys sort of bought [indiscernible]. And at some point, having more of a presence in admitted may be very helpful if volume and appetite kind of returns to admitted in a way you could use that growth opportunity. I mean is that -- are we closer to that? Are you seeing that kind of opportunity to take some of what was going into the E&S market?

I think the MidCorp business, I think, is very different from the E&S business. We write today -- I think the E&S business we write today, I think, is very distressed. I think the MidCorp business is mostly property-led, low severity. So that business doesn't lend itself to be in the E&S market. And I think the attractiveness of the MidCorp business is it's difficult to access. It's limited access.

I think we had to buy a platform to become a player in the space. So I think we've been trying to be a bigger player in that space for probably the last 5 or 6 years, but scale matters and the ability to have decent sized property limits in the hundreds of millions to solve the problem of the agency network, I think, is key.

So I think those are 2 different business and the attractiveness of the MidCorp business is really that it's less subject to cycle and it's more -- you have a higher -- the value proposition, the thing you do for the reason is more with the agents and the insurer because you provide multiline and there is one agent. So I think it's -- my view is it's a different business.

I mean, a little bit related to that, Alex, I think there's still -- we still see business flowing into the E&S market. I mean, slightly different again than what would be middle market to us at least. But yes, E&S markets are growing, maybe not as fast as they were the last few years. There's some maybe moderation in how much of the business is shifting over because, again, as you know, like [indiscernible] markets, you need to get rates approved, et cetera. So that takes time and some of that work has taken place. So admitted carriers are maybe in a slightly better position in some areas to retain that business. But E&S market is still big picture doing well.

Yes. I think one comment on the E&S side. I think we see -- as long as we have this issue with social inflation and I think we see more of the casualty business flowing into the E&S market because you can write it at your own price with your flexible set of exclusion that is not always available in every market. So I think that trend view will continue.

And your next question is from Andrew Andersen from Jefferies.

You had mentioned some casualty pricing above loss trend. And I think in the past, your view of loss trend was maybe 2 to 2.5 points above CPI and for excess layers, perhaps even higher. Can you just provide us with your latest view on loss trends?

Yes. It would be unchanged. I think I would say mid-single digit on the primary and double digit on the excess. I think that's what we used. And I would say unchanged compared to a year ago.

And then just on the Mortgage segment, I think some mortgage associations are talking about originations picking up in '26. Are you kind of thinking about that as we turn to next year? Or are you still envisioning more of a softer market there?

Great question. I think, as you know, I mean, economic forecasts are going to get updated. We still see at least for the next little while, mortgage rates kind of staying where they're at. That's certainly -- that's not ideal in the sense of creating housing -- more housing demand. But we'll see. I mean, into '26, maybe things will change a little bit. Maybe interest rates come down at that point and mortgage rates follow. But yes, I mean, that's something we look at very carefully. But I mean, too early to really have a clear view of that at this time.

And your next question is from Brian Meredith from UBS.

Just 2 quick ones here. The first one, just following back up on the MCE program business. Can you scale how much business is that? And did you just start nonrenewing? I was surprised you said it's another 12 to 18 months before we're going to see the benefits there given I thought you started to get notifications when you closed the deal.

Yes. So I think of the total, it's probably 1/3, I would say, 1/3 was program. And that's not why we bought -- I want to be clear. So we bought the portfolio for the other 2/3. So that we've been able to scrutinize. And as you know, Brian, it takes time. You have to go to the end.

So I think we we've mostly taken underwriting actions and looked at the list of program we could renew when the time comes and talking to the NGS to give them enough notice. So I think that's where we are. So I think I expect most of the effect to start in 2026.

And Brian, on that, just to be clear, on an earned basis, right? So on a written basis, some of these actions were taken late last year, early this year. So on a written basis, you will start to see some reductions or some changes in the second half of '25. But the full 12 to 18 months on an earned basis is really why. I mean that as these -- the earnings kind of take a bit longer to come through.

All right. That makes sense. And then the second one, Francois, I'm just curious, could you give maybe an update on where we stand with Bermuda tax credits, not the DTA stuff, but the credits that I know the Bermuda Monetary Authority has been talking about providing?

Unfortunately, no official news. I mean, it's certainly being discussed and worked on. We are hopeful. I mean we're optimistic really that we'll come to a good place with the Bermuda government. It's -- we love Bermuda. I think the Bermuda government -- I know the Bermuda government likes Arch and others being on the island.

So we're a big part of the community here. And it's -- I mean, it will be -- effectively, it's a negotiation with not only the Bermuda kind of involved parties, but there's the OECD that kind of has a little bit of some oversight there. So we're expecting more development in, call it, the third quarter, kind of late third quarter and with hopefully some kind of actionable items in the fourth quarter for us. So we'll give you an update next quarter. But right now, I mean, there's nothing official that we know of that we can really share with everybody here.

That's helpful. And just quickly, too, Francois, on that one. If indeed, these do happen to come through, are they a credit to your taxes? Or do they sit somewhere else in the P&L?

Well, what's been talked about in big picture is a job credit effectively from the Bermuda government, and that would most likely come through as a reduction to our operating expenses. So the tax rate per se would not be impacted, but it would impact -- I mean, most -- well, all places where we have operating expenses in Bermuda.

So for us, it'd be in each of our segments because we have Bermuda-based expenses in each of the 3 segments. It would also impact a little bit our investment income because we -- our expenses flow through that. We've got our investment professionals here based in Bermuda, also would impact our corporate expenses because Nicolas and I and others are based here in Bermuda. So that's where -- so it would hit a couple of different spots on the income statement, but would come through again as an offset to operating expenses.

And your next question is from Meyer Shields from KBW.

Two quick modeling questions. First, if we add back the 20 basis points of, I guess, acquisition accounting impact for the insurance segment's acquisition expense ratio, is that a good run rate going forward? Or are the changes in the program business going to change that as well?

I mean, I would start there. I mean, the -- again, the benefits or the impact, call it, to the loss ratio as we -- as our underwriting actions on the programs business kind of materialize, we'd like to think that we can get more than that exactly when that takes place or when that again, shows up in our underlying performance, it's a little bit -- it's not that clear, right? So -- but we'd like to think that we can do better than that. If not later this year, it will be in 2026.

Okay. That's helpful. And then second, just because MidCorp, I think in the past, you've talked about having a significant property exposure. And a couple of carriers this earnings season have talked about particularly benign weather and low non-cat losses. I was wondering if you saw anything like that in the MidCorp book.

I think this quarter was a pretty low cat quarter. So I think when we started, we got a little bit unlucky, I think, with some of the hurricanes and then the wildfire. But I think for the first time this quarter, I think we got a low cat quarter. So I agree with the sentiment.

And your next question is from Jamie Bhullar from JPMorgan.

Sort of question just differentiating between pricing movements versus price adequacy. If you look across your business, where is it that you're seeing attractive growth opportunities across reinsurance and insurance versus maybe highlight some of the lines where you might have been active in the past, but you just feel like the risk reward is not that compelling.

Yes. So I think most of the casualty line, as I said earlier, we see price being greater than loss trends. So I think that -- and I think -- I don't think the entire -- I said this in prior calls, I don't think the entire casualty market is attractive to us, but there is selected pockets of that market, especially in the excess and surplus side of the market, the more specialty that both on the insurance and reinsurance, we have a strong appetite to grow. And I think on the insurance, our team is very specialized.

So I think we have a high confidence that they'll be able to find the right opportunity. And I think on the reinsurance, it is really backing the right underwriting teams, people that have expertise in writing the liability portion of those risks that are difficult to price. I think we also have, I think, some ability to grow of our retail casualty where we are primary because I think we -- our value proposition -- I mean, it's a competitive marketplace, but I think our value proposition resonates well with the big retailers and the mid-market retailers.

So I think we like that. I think we as I said in my prepared remarks, we have built in London, I think, a decent franchise and leading capabilities that kind of should -- or should help us continue to grow despite a more competitive marketplace. And I think MidCorp certainly is an area where we think we're still getting double-digit rate increases.

And I think as we continue to integrate the platform, we think we have a decent -- based on the value proposition that we have, we have an ability to grow. I think in terms of the areas that are more challenged, I mentioned them earlier, I think D&O, cyber, that's not new. E&S property, I think still very attractive rate levels, but I think the competition is fierce, I think. So I think it's areas that we're watching carefully.

And then on MI, like obviously, if rates decline, there would be a pickup in growth. But do you think a decline in rates overall would be a positive for the business or negative given that there's a high likelihood that if rates decline a decent amount, then persistency suffers and the in-force book, which is producing very high margins might begin to run off a lot faster. So what's sort of an ideal scenario for the MI business from a profitability standpoint? And how do you view declines in interest rates affecting that?

Yes. I think -- I mean, we do all this work, right? I mean, a function of how much rate, what it would take in terms of rate declines for in-force book to have more propensity to refinance. So if rates drop 50 bps, it's not a big deal for us. I think we see more benefit in terms of homes being more affordable.

So I think the new production would overtake that kind of negative in terms of refinancing. So -- but if there's a big refinancing boom, then yes, we pick up that share. So it's -- and obviously, we like the in-force book a lot. I think it's high quality. It's got a lot of home equity built into those mortgages. So we wouldn't mind giving up a little bit of that in exchange for new business. But absent -- I'd say absent a significant drop in interest rates, I think the in-force book will stay with us for quite some time.

Yes, we have some room in that respect.

And your next question is from Wes Carmichael from Autonomous Research.

I know we're over time, so I'll just keep it to one. But I had a question on reinsurance. From some of our conversations with some industry participants, it sounds like there was a bit of a return of aggregate treaties with midyears. So I was just curious how you think about your exposure to aggregates and if your appetite at all has changed to write that business.

I don't think so in anything that's material. By the way, for the record, we always write aggregate treaties, but we -- it's a very small portion of what we do. And I think, yes, the flavor of the day a few years back was aggregate dropdown and all the good stuff that you see in a softer market. We haven't seen a huge comeback and our team haven't supported the few that have come to the market.

And your next question is from Elyse Greenspan from Wells Fargo.

I just had a follow-up, I guess, coming back to some of the MidCorp discussion. I guess we were talking about, right, just the programs piece of it, which I know is going to have an impact on the margin. But I know when you guys announced the deal, right, the goal was to get this business right, in line with legacy Arch, right? So obviously, the 100 basis point drag on the underlying loss ratio in the quarter.

Can you just -- and it sounds like, right, the program piece will impact next year. Can you take us through like should we start to see some improvement relative to MidCorp and serving as like a tailwind to that insurance segment underlying loss ratio next year and then it picks up more steam in '27. I just want to understand the cadence of kind of the improvement in the MidCorp margin and the trajectory to get in line with legacy Arch?

Yes. So our long-term thesis for making the acquisition and I think the targeted profitability, I think, is unchanged. I mean the timing, it's hard to predict. We're doing a ton of work around it, preparing again. But I don't have a crystal ball as far as what the market will do around us. But I think the thing we feel good is that the assumption that we use, I think we'll be able to realize over time.

I am not showing any further questions. I would now like to turn the conference call over to Mr. Nicolas Papadopoulo for closing remarks.

Yes. So I want to thank you all for participating in the call and wish everyone a great summer. Definitely, Francois, we need to take some a bit of time off. And I want to reiterate one more time that we think the market we trade in is very attractive and the challenge, our challenge and a lot of challenge around this market is really generating new business. I think that's really it. So again, thank you, and enjoy the summer.

Thank you, ladies and gentlemen, for participating in today's conference. This concludes the program. You may all disconnect your lines.